+3 Commerce

Vol.-l& ll
Unit-l , ll, lll, lV & V

CORPORATE ACCOUNTING
Authors:
Dr. Ashok Kumar Rath

Editer:
Dr. S.K. Acharya

General Editor:
Prof. S.P. Pani
Director, DDCE

eou"?'tDiJn'Fo,. err

DI RECTORATE OF DISTANCE & CONTINU ING EDUCATION

UTKAL UNIVERSITY BHUBANESWAR-7 51007
 +3 Commerce
Vol.-l& ll
Unit-l , ll, lll, lV & V

CORPORATE AGCOUNTING
/
Authors:
Dr. Ashok Kumar Rath
Assistant Professor, MBA,
Regional College of Management, Bhubaneswar

' Editor:
Dr. S.K.Acharya
Asst. Course Coord inator,
Management programme DDCE, Utkal University

General Editor:
Prof. S.P. Pani
Directol DDCE

D.D.C.E.
Education For All

DIRECTORATE OF DISTANCE & CONTINUING EDUCATION

UTKAL UNIVERSITY BHUBANESWAR-751O}7
. Website:www.ddceutkal.org
 CORPORATE ACCOUNTING
Vol,-l& lt
Unitl , ll, lll, lV & V

o"notor.
u"nok Kumar Rath
Assistant Professor, MBA'
fi of Management' Bhubaneswar
"g't;;ic"il"ge

Published bY :
coNrrNUrNG'EDUcA'oN
BIREEISSitE oF DrsrANcE & aHUBANESwAR'751 004
u NlvERsriv, vnniVrrrnR'
urKAL

@CoPYright:
DIRECTOR'
CONTINUING. EDUCATION
DIRECTORATE OF DISTANCE & 751 OO4
UTKAL UNIVERSITV, VIHVTUER, BHUBANESWAR'

Published : 2016

Copies ; 600 nos'

ti Printed at :
c*toCAD
- 751 007
442, Saheed Nagar, Bhubaneswar
Tel. . 0674 - 2544 631
 e4,..?tDij'Fo,arr \
DIRECTORATE OF DISTANCE & CONTINTIING EDUCATION
I,"TKAL UNIVERSITY : VI\NI VIHAR
BHUBANESWAR:-751007

From the Director's Desk

Evening College
The Directorate of Distance & Continuing Education, originally established as the University
way back in 1962 has travelled a long way in the last 52 years. 'EDUCATION FOR ALI-:
is our nrotto'

lncreasingly the open and Distanoe Learning institutions are aspiring to provide education
for anyone,
anytiIne anJ anywhere. DDCE, Utkal University has been constantly striving to rise up to the challenges
of
poftals of this
Open Distance Learning system. Nearly ninety thousand students have passed through the
but
great temple of learning. We may not have numerous great tales of outstanding academic achieVements
we have great tales ofsuccess in life, ofrecovering lost oppodunities, tremendous satisfaction
in life, turning
points in career and those who feel that without us they would not be where they are today. There are also
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fifteen
students within top ten ofhonours merit list ofEducation, Sanskit, English and Public
Administration, Accounting
and Management Honours. Our students must be free from despair and negative attitude. They must
be

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and to

address the,quality concems ofour stake holders over the years, we are switchirlg.over to self instructional
quality SIM
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go beyond

the course ware providedby us. We are aware that most ofyou are working and have also
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Please remember that only a busy person has time for everlthing and a lazy person has none. We
are sure

be able to chalk out a well planned programme to study the courseware. By choosing to
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you will
course in distance mode, you have made a commitment for self improvement and acquiling higher
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qualification. You should rise up to your commitment. Every student must go beyond the standard books and
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student

should come to the personal contact programme well prepared. The PCP should be used for clarification of
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vour feedback on the course ware to us. It is very impoftant that you discuss the contents of the course
materials with other fellow learners.
We wish you happy reading. .$\cr-
(S.P. Pani)

DIRECTOR

i
 Content

1. Unit I Share Capital and Loan CaPital 1

2. Unit ll Financial Statement 159

3. Unit lll Valuation of Goodwill 197

4. Unit lV Accounting for Amalgamation of companies 229

5. Unit V Funds flow statement 274

 SHARE ITAL FAucePITAL

Objectives of this lesson :

When you complete this lesson

you will be able to -
Define comPanY

Meaning of comPanY

Types of company

Brief discussion of formation of a company

Statutory records of a company

Capital of a company

Types of share caPital

lssue of share caPital

Forfeiture of share caPital

Re-issue of forfeited shares

Redemption of Preferenoe shares

Meaning of debentures

Types of debentures

lssue of debentures

Redemption of debentures
to the end of this lesson and take
the'selt
After going through this lesson in detail' turn
lesson'
test'. lf you are ready to begin with the next
LESSON OVER VIEW

INTRODUCTION:

The objectivd of company account is to know methods of preparing the books of accounts
of the corporate houses to determine the net income and financial position of the orglanieztlton

Definition of GomPanY -
Section 3(1 Xi) of the companies Act 1 956 defines a company as "company formed and
r€gistered under this Act or an existing compant''. An existing company.means a company
formed and registered under any of the former companies Acts'

Meaning of a companY -
A company is an association of persons with capital contributed by them to carry out a
common purpoJe i.e., to earn profit out of it. The capital of a company is divided into numerous
transferable shares. lt enjoys perpetual succession, a common seal and Iegal entity different
from its members.

CHARACTERISTICS OF A COMPANY :

To have a ilear idea regarding status ofa company let us discuss the characteristics of
a company as follows.

1 ,2 The basic characteristics of a company are as follows :

. separate Legal Entity : A company enjoys a separate legal entity distinct from its
members. lt is treated as a separate legal person having duties and rights distinct from
those of its members. The scope of its activities and the working of the compahy is
r6gulated by ils Memorandum of Association, Articles of Assoiiation, provisions of the
Companies Act and SEBI guidelines.'lt can own properties, enter:inio contracts,'eic. in
his own name. lt is held responsible for the actS of the company'
. Common - seal : A company, being an artificial legal person, acts through riatural
persoris. These natural persons act on behalfofthe company and sign on behalf of the
company under the common-seal of the company.
. Limited Llability : Liability of the members is limited to the contribution promised by
them. In a company limited by shares, members (also called sharqhotders) are liable to
contribute the value of shares held by them. ln case a company is limited by guarantee,
members are liable to contribute the guaranteed amount only. For academic purposes,
a company can have members with unlimited liability. These conipanies are -called
unlimited comoanies.

z
. Separation of Ownership and Management : As the number of shareholders is very
large. management is entrusted to a select few. They elect their representatives in
shareh,clders meeting to direct the affairs of the company. Elected representatives are
calleC Direclors and the group of directors is termed as 'Board of Directors', Board of
Directors manage the affairs of the company and for certain crucial decisions they
again corne to the bddy of shareholders. In shareholders meeting, decisions are taken
by passi,rg a resolution. Resolution passed with simple majority is called Ordirrary
Resolution'and if it is to be passed with three-fourth majority, ii is referred to as 'Special
Elesolution'.
. Perpetual Succession : Company being an artificial legal person, is not affected by
the death, insolvency, lunacy, etc. of its members. lt is created by law and comes to end
only by the process of law.
. Transferability of Shares : Member ota company can transferhis interest or share in
the company without the concurrence of other membe.rs. lt provides liquidity of
investment. Facility of transfer of shares, alongwith limited liability has made company
form of organization very pop,llar.
. Registered Association of persons : Company is an associaiion of persons for some
common object formed and registered under the Companies Act, 1956. Sometimes
people associate together not for making profits but for promoting art, science, religion,
charity or any other useful object. These associations, registered under the Act may be
termed as 'Associations not-for-profit. Generally, a number of individuals get united for
business and normally form a 'Company Limited by Shares'.

TYPES OF COMPANY: .

Types of companies may be as follows : '

1 . Chartered company : A company formed through a royal charter is called as chartered

company. Now.a days such type of companies are not existing. For example - East
India Company, South Sea House etc.

2. Statutory Companies : Staiutory companies are formed by the special Act passed by
the central or state legisiature. For example-Reserve Bank of India, Life lnsurance
corporation, state Finance .corporation etc.

3. Registered Gompanies : Companies registered under the compahies Act are known
as registered companies. For example-public limited company.

4. Private Limited Company: According to sec. (3(ixiii) a private company means a

company which has been formed without issuing the share to collect the capital fror.t
the oublic.

?
5. public Limited Gompany : A company which has been formed by collecting capital
through issue of share capital is called as public limited company.

tt. Limited company : A company lirnited by share or guarantee is called limited company.

l. company Limited by shares : A cbmpany in which the liability of the members is

limitbd to the amount of shares he has agreed to contribute is called as company limited
by shares.

B. company Limited by Guarantee : A company in which the liability of the members is

limited to the guarantee fixed by the memorandum is called as company limited by
guarantee.
g. Government company : According to sec.617, a company, if which not less than 51olo
of the pgid up share capital is held by the central government or by any state Government
or party by central government and partly by state Government or a company which
is
'a subsidiary of a government company.

Difference between publlc ltd company and private limited company

4
 Membership of private Membership of a public
company is restricted to company is not confined
friends within the friends.

Restriction regarding No restriction li can be paid upto a

managerial remunera maximum limit of 11%.
Use of the word Iimited The word 'private Ltd" is The word Ltd is used at the
used at the end of the €fld of the name of public
name of private company cQfnpany.

HOWA COMPNAY IS FORMED :

After knowing the types of company let us discuss how a company is formed. As you
know a company is an artiflcial person which is created by law and closed down or liquidated
by law. A company is formed as discussed in the following paragraph.

After having examined the future prospects of the company and after having ascertained
from lhe registrar of companies. that ihe proposed name of the company is available, the
oromoter makes himself busy with the preparation and registration of memorandum of
association, articles of association and many other documents. He fnds the first directors of
the company accumulates funds and arranges for its advertisement. Thus formation of a
company involves three important stages as follows :

ti) preparation and filling of necessary documents

(ii) payment of necessary fees and

(iii) registration of a company and obtaining the certificdte of incorporition.

After obtaining the certiflcate of incorporation a company is said to be formed. So a

private limited company can starts its business after obtaining a certificate of incorporation.
But a public limited company can start iis business after obtaining the certificate of
commencement.

BOOKS OFACCOUNTSAND PREPAMTION OF FINALACCOUNT :

Section 209 of the Indian Companies Act. '1956 prescribes the books of account to be
maintained by a company as follows :

(a) Such books as are necessary to give a true and fah view of the state of affairs of the
company and to explain its transactions, are kept on accrualbasis and according to the
double-entry system of book keeping.

(b) Every company maintains proper books of account with respect to ;

6
 and expanded by the company and the matters
in
(i) All sums of money received
expenditure takes place;
resoect of which receipts and
goods by the company;
(ii) All sales and purchases of
company and:
(iii) All assets and liabilities of the

(iv)Utilizationofmaleria|orlabourorotheritemsofcostsincostaccountingrecords
in case of manufacturing company'

Section2llalongwithscheduleVlofthecompaniesAct'lg56dealswiththepreparatron
to give a'true and fair view
presentation of profit and loss account and the balance sheet
and
company'
of the state of affairs of the
of the compantes
it requires that every profit and loss account and balance sheet
Furiher, by the central
tn" ut"ounti;g"i""O"tOt issued by the lCAl and prescribed
shall comply witn
accounting standards
in consolation witn tne nationat advisory committee on
oovernment
Act' 1956'
l"i"o'ni* under section 210 of the companies
MAINTAINED BY A COMPANY:
STATUTORY BOOKS AND RECORDS

Statutory Books -
the law' Non-
are those booKs which a company is required to keep under
These Every
of these books involves penalties for the management of the company
maintenance
books'
.o*Out must maintain the following subsidiary
by the company not held in its
own name [section 49 (7)l
1. Register of investments made
58 (A)]
2. Register of fixed deposits [Seciion
any charge requiring iegistration [Section - 136]
3: Copy of every instrument creating
Register of mortgages charges [Section -
143 (1)]
4.
Register of members [Section -
150 (1)]
5. the Register of
company has more than.50 members unless
6. Index of members, if the
in itself constitute an index [Section
151 (1)]
members is in such a form as witi

Register and index of debenture holders lsection -

152]
7 .
B.Foreignregisterofmembersanddebenturedholdersandtheirdup|icateslsection-
157 and 1581

9. Minutes books [Section - 193]

l0.Registerofcontractswithcompaniesandfirmsinwhichdirectorsareinteresteddirectly
or indirectlY [Section - 301]
 . Register of directors, managing directors' manager and secretary [section -
303i
11

t 2. Register of directors share holdings lsection

- 307]
l3.Registerof|oansguaranteesetc.toorinvestmenisin.sharesordebenturesofcompan|es
in the same group [Section 370 and
3721

7 of the Companies ( lssue of

14. Register of renewled and duplicaie certificates [Rule
share certificate) Rules 1960'
there are many other books which are'generally
ln addition to the above statutory books,
maintainedbycompaniesandareca||edstatistica|ornon.statutorybooks.Thefo||owing
compantes'
statistical books are generally maintained by

1. Share application and allotment register

2. Share call register
3. Debenture application and allotment register
4. Debenture calls register
5. Register of share certificates
6. Register of share warranrs
7. Register of share transfers'

B. . debenture holders interest register

9. Share holders dividend book

10. Debentures transfer register '

11. Register of certification and balance tickets'

12. Register of Probates

1 3. Register of dividend mandates
,14. Agenda book
1 5. Register of sealed documents
16. Register of Powers of attorney
17. Directors attendance book
SOURCES OF CAPITAL OF A COMPNAY :

purposes some funds are required to make

long
A company requires funds forvarious funds
building, prant and machinery etc some
term investments such as purchase of rand,
areneededtomeetshort-term-needssuchasworkingcapita|.Somefundsmayberequired

t
tomeetmediumtermneedstoo,e'g',overhaulingofmaihinery'heavyexpenditure'.1nfon
with reference
u programme of advertisemenl etc, The sources of funds are decided
"rrtain"o ,;*rements for finance, tong-term ald medir{n-term needs are met bv issue
; ffi;;;;; '|g!g-term loans' Working capital needs can be
of shares and debentures and by raising
banks etc'
meet by raising short'term loans from commercial

SHARES:
Tota|capita|ofthecompanyisdividedintouniisofsma|ldenominaiion''Theunitsinto
whichthecapita|ofthecompanyisdividedisca||edashare,Forexamplethetota|capita|of
acompanyisRs.l,00,000diviOeOintol0,00gsharesofRs'l0eachthensuihunitofRs'10
is balled as share of Rs.10 each'

manner

Companies issue three classes of shares as follows

:

(i) Equity shares

(ii) Preference shares
(iii) Deferred shares

Equity Shares -

X
 Cumulative preference shares - A
preference share is said to be cumulative when the
are paid before pqying any dividend
anears of dividend are cumulative and such arrears
has 10000 B% preference shares of Rs 1 00
to equity shareholders. Suppose a company
nct been paid so far' The directors before
each. The dividends for 1987 and 19BB have
iheycanpaythedividendtoequityshareholdersfortheyearlg8g'mustpaythepref'
dividends of Rs'2,40,000 i'e' for the year
1987' 19BB and '1989 before making any
year 1989'
payment of dividend to equity shareholders for the
of non-cumulative preference shares'
fiil Non-cumulative preference shares - In the case
profits of each year' lf there are noprofits in
the dividend is oniy payable out of the net
u""i ,n" lt dividend cannot be claimed in the subsequent years' lfyear' the
""t "rrurru
oiviOlno on the preference shares is not
paid by the company during a particular
expressly described
;;;;.;;;rence shares are presumed to be cumulative untess
as non-cumulative.
which are entitled irl addition to
(iii) Participating Pretference shares - Are those shares
bdlance of profits wiih equity
preference dividend at a fixed rate, to participate in the
on their shares' The participating
shareholders after they get a fixed rate of dividend
preferencesh'aresmaya|sohavetherighttoshareinthesurpIusassetsofthecompany
provided in the memorandum or
on its winding up. Such a right may be expressly
-
articles of association of the company'
preference.shi:t-
(iv) Non-pafticipating preference shares - Non-participating "-:"^,"^:l''"0
profits' The. prelerence
and do not share in the surplus
only to a fixed rate of dividend
expressly provided in the
shares are presumed to be non-participating, unless
memorandum or the arlicles or the terms of issue'
preference shares are those shares which
(v) Coivertible preference shares- Convertible
period'
can be converted into equity shares within a certain
shares which do not carry the
(vi) Non'convetiible preference share -These are those
right of conversion into equity shares'
by shares' may if 9o suthorised by
(vii) Redeemable preference shares - A company limited
as per the provisions laid
its articles issue preference shares which are redeemable
downinSectionB0.Sharesmayberedeemedeitherafterafixedperiodorearlierat
the oPtion of the comPanY
which carry the rightto a fixed dividend
(viii) Guaranteed preference shares -Are ihose shares
profits
even if the company makes no or insufficierit
Dlfference between equity shares and preferencE shares -
The following are the points of distinction between preference shares and equity shares.

1. Preference shares are entitled to a.fixed rate of dividend. The rate of dividend on equity
shares depends upon the amount of profits available
2. Dividend on preference shares is paid in priority to equity shares. In other words the
dividend on equity shares is paid only after the preference dividend has been paid.
3. The preference shares have preference s to capiial and the equity shares rank behind
the oreference shares for repayment of capitai on winding up'
4. The voting rights of preference shareholders are usually restricted. An equity shareholder
can vote on all matters affecting the company but preference shareholder can vote only
When their special rights arb being varied or their dividend is in arrear'

5. Redeemable preference shares may be redeemed or paid back.by the company but
equity shareholddrs cannot be paid bagk except under a scheme involving reduction of
caPital.

6. lf the preference shares are cumulative, the dividend not paid in any year are
accumulated and until such arrears of dividend are paid, the equity shareholders are
not paid any dividend.
Capital -
The word 'capital' used in connection wilh a company has several different meanings

0 Authorised, registered or nominat capitaF fhis is the amount of capital with which the
company intends to get itself registered. This is the amount of share capital which a
company is authorized to issue. Nominal capital is divided into shares of a fixed amount.
. lt must be set out in the memorandum of associatibn. lt can be increased or decreaEed
by following the prescribeQ procedure.
(ii) Issued capital- lt is that part of the nominal capital which is actually issued by the
company for public subscription. Acompany need not issue the entire authorized capital
at once. lt goes on raising the capital as and when the need for additional funds is felt.
The difference betwebn the nominal and the issued capital is known as'unissued capital'.
Where the wholi of authorized capital is offer:ed to the public, the authorized and issued
capital will be the same.
(iii) Subscribed caprlal - it is that amount of the nominal value of shares which hgvd actually
been taken up by the public. lt is that part of the nominal capital which has,dbtually been
taken up by shareholders who have agreed to give consideration in kind or in cash for
shares issued to them. Where shares.Lsued for subscription are wholly subJcribed for'

10
 issued capital would mean the same thing as'subscribed capital"

0v) Catled up capital - The amount due on the shares subscribed may be collected from
the shareholders in instalments at different intervals. Called up capital is that amount of
the nominalvalue of shares subscribed forwhich the company has asked its shareholders
10 pay by means of calls or otherwise. lf 10,000 shares of Rs 100 each, have been
subscr;bed by the public, and the company has asked the shareholders to pay Rs.10
jn appljcation, Rs.20 on allotment and Rs.30 on first call, then the called up capital of
tlre company would be Rs.6,00,000 The remaining amount i.e', Rs.40 per share on
1'1,000 shares i.e. Rs. 4,00,000 &ould be the uncalled capital of the company.
(v) ,taici up That part of the called up capital which is actually paid up by the
capital -
r,rrrmllers rs known as the paid up capital. ln other words, paid up capital represents the
tota' payments made by the shareholders to the company in response to the calls
macie by the company. Paid up capital of the company is calculated by deducting the
cails rn arrears from the called up capital. lf in the above example, out of 10,000 shares
of Fts.100 each, on which Rs.60 has been called by the companyfrom the shareholders,
one shareholder, holding 100 shares, falls to pay the first call of Rs.30 per share on his
shares, the paid up capital of the company would be Rs. 6,00,000 - Rs. 3,000 i.e.
rs.5,97,000.
Reserve Gapital -
According to Section 99 of the Indian Companies Act 1956. lt is the capital, which has
not been called up by the company and it has decided, not to call the uncalled capital,
except, on its winding up, by passing a special resolution. So the reserve portion of the
subscribed capital becomes reserve capital and it will be available onlyto the creditors in
case of liquidation of the Company.
DIFFERENCE BETWEEN SHARE AND STOCK
Shares Stock
1 Shares can be partly paid or fully paid 4
A stock will only be fully paid
z The shares have a nominal value z- A stock has no nominal value
? Shares are transferable only in nominal Astock can be transferred in parts or in
vatue fraction.
4 The shares are given a distinct number The stock has no distinct number
A A company can issue shares at the first The stock cannot be issued at first
instance instance
o The shares can be issued for public 6. The stock cannot be issued for public
subscription subscription
7 Any type of company can issue shares Only companies Iimited by shares can
issue stock

11
 ISSUE OF SHARES :

Apub|iccompanyissuesaprospectusinvitinggeneiaIpub|ictosubscribeforitsshares
onthebasisofprospectus,app|icationsaredepositedin.aschedu|edbankbytheinteresteo
partiesalongwiththeamountpayableatthetimeofapp|icationknownasapp|icationmoney. closing date
money cannot bu i"r, tnrn 5% ofthe face value of shares. After the
Application about allotment of
issue (i.e., the ru.t oat" io, tiring the applications) company decides
of the
il;;" ,; with the SEBI and siock exchange concerned'
"on"ultution padially
reject or accept an application fglly or
The company reserves the right to pay lhe
applicants become shaiehofders of the company and are required to
successful
money and unsuccessful applicants S:t
second installment Xnown a" allotment '?ack 'th:T
in installments as
.iar". is generally received by the company
. money. The issue pri"" or
follows :

Fist installment Application money

Second installment Allotment moneY

Third installment - 1* call money

Fourth installment Second and final call moneY'

follows:
shaies of Rs'10 each at Rs'10 each as
Four example:Acompany issued 1000

Share aPPlication moneY - Rs'2

Share allotment moneY - Rs'3

Share 1"t call moneY - Rs 2
Share 2^d call moneY - Rs'3
SHARE GAPTTAL:
JOURNAL ENTRIES FOR ISSUE OF
oJ shares' types of shares and
how the share
We have already discussed the meaning
.

capita|isissuedbyu.o'o"ny.Nowwewiltdiscusethejournalentriesto.bp:passedfor
shares'isiued bi a cbmpany'
(1) on receipt of application money :

Dr
Bank AJc
To share application AJc

(Being the application money on "'"""" shares @ Rs"""' ' per slraro receitye)

12
-L. T a'ic-€:ti of shares
as
is transferred to share capital account
3; -=rst ile application money on allotted shares
iolof,s :
Dr
9se Agelication AJc
Ts srare capital A/c
to share capital A/c)'
tseing Lne share application money transferred
money will be
courd not be alotted, their application
-i :€ af,plicants to whom the shares
passeo :
:=.rnred. The following journal entry is
Dr
$rere APplication AJc
lo Bank AJc

i3eng 'rlre application money of shares returned)

this the
becomes due to the company' For
on arkrtment of shares the allotment money
iCowing journal entry is Passed :
Dr
Share allotment account
To share caPital Account

(Being the share allotment money due on """ shares

@ Rs....... Per shares;

When allotment money is received
Bank account
To share allotment accounl
(being the share allotment money received)
tho entry is :
On making the first call money due {rom shareholders
Dr
Share first call account

To share capital account

(being the firsi call money due on """' Shares @ Rs"""" ' Per shares)

is
On receipt of the firsl call money the entry
:
iA)
Dr
Bank account
To share first call account
shares @ Rs' Per share received)
(being share first call money """
NB : Similar entries will be passed for second call' third and fihal call' if any'
Example - 1

Binary|tdissuedl0,000equitysharesofRs.l000eachpayableRs.20onapplication'
Rs 20 on 2"d and final cail' All the shares are
Rs.40 on allornrent and Rs:20 on first call'
subscribedandamountsdu|yreceivedpassthejourna|entriesandgiveaBa|ancesheet.
Solution -
1.BankaccountDr.2,00,000toshareapp|icationaccount200000(forapp|icationmoney
for 10000 shares @ Rs' 20 each received)
To equity share capital"account 200000
2. Equity share application accoont Dr' 200000
capital account)
(for share application money transferred to'share

3'EquityshareallotmentaccountDr400000toequitysharecapita|account400000(for
Rs' 40 per shares)
share allotment money due on 10000 shares @
account 400000 (for share allotment money
4. Bank account Dr.400000To share allotment
received)
share capital account 200000 (for
5. Equity share l"tcall account dr' 200000 to equity
per share)
share l"tcall money due on 10000 shares @ Rs'20
200000 (for share 1"t call money
6. Bank account Dr. 200000 to share l"tcall account
received on 10000 shares @ Rs' 20 each)

T,Equityshare2dandfina|cal|accountDr200000toequitySharecapitalaccount200000
and final call money due on 10000 shares @
rs'20 each'
(for second

B.BankaccountDr.200000toShare2ndandfina|cal|account200000(forshare2dfina|
call money received on 10000 shares @ Rs'20)'

BALANCE SHEET OF Blr{ARY LTD as on.

ISSUED
WHEN BOTH PREFERENCE AND EQUITY SHARES ARE

|facompanyissuedbothpreferenceandequitysharesthenitisdesirab|ethatthe
entriesforapplicationmoney,al|otmentmoneyandca||smoneyshou|dbeseparatelypasseo
for each type of share capital.

14
 Example - 2

ABc Ltd issued 1000 equity shares of Rs.iO each and 2000 preference shares of
Rs.100 each on equity shares Rs.2 on application Rs.3 on alrotment, Rs.2
on share 1., carl
and Rs.3 on share second call on preference share Rs.20 on 1.r call and
Rs.30 on 2",'and
inal call. All t[e shares were subscribed and amounts duty received.
Solution
1. Bank account Dr. 20000 to equity share apprication account (For apprication
morrey
received on 1000 equity shares @ Rs. Each.

2- Equity share application Account Dr. 2000 to equity share capilar account
2000 (For
application money on 1000 equity shares @ Rs.2 each was transferred to
equity snare
capital)

3- Bank account Dr. 40000 to preference share application accoun140000 (For

appricatron
money on 2000 preference share Rs.20 was received)

4- Preference share apprication iccount Dr.400000 to preference share

capitar account
40000 (for apprication money on preference share was transferred to preference
share
capital account)

5- Equity share allotment account Dr. 3000 to equity share capital

account 3000 (For
allotment money on 1000 equity shares
@ Rs. 3 was due.
6' Bank account Dr. 3000 io equity share aflotment account 3000 (For
a|otment monev
on 1000 equity shares @ Rs.3 was received)

7 ' Preference share allotment account dr. 60000 to preference

share capital account 60000
(For allotment money on 2000 preference share
@ Rs-30 was due)
8. Bank account 60000 to preference share alotment account 60000 (allotment
monev
on 2000 preference shares @ Rs.30 per share was received)
9. Equity share 1"' call account Dr. 2000 to equity share capital
account 2000 (For 1"r carr
money gn 1000 equity share @ Rs.2 each was due)

10. Bank accqunt Dr. 2000 to equity share l"rcall account 2000 (For
equity share l"rcarr
money on 1000 shares @ rs.2 each was received)

11. Preference share l"rcall account dr. 40000 to preference

share capital account 40000
(For 1"r call money on 2000 preference shares Rs. 20
@ each was due)
12' Bank account Dr.40000 to preference share 1"rca account
40000 (For 1"rcal money
on 2000 preference share @ Rs. 20 each was recejved)

15
tJ. Equity share 2"d call accounl Dr. 3000 to equity share capital account 3000 (For equity
share 2nd call money due on 1000 shares @ Rs.3 each.

14. Bank accou nt Dr. 3000 to equity share 2"d call account 3000 (being equity share 2"d call
money received on 1000 shares @ Rs.3 each)
'15. Preference share 2"d call account Dr. 6000 to preference share capital account 60000
(For preference share 2nd call money due on 2000 preference shares of Rs.30 each)

16. Bank account Dr. 60000 to preference share 2nd call account 60000 (For preference
share 2nd call money received on 2000 shares @ Rs.30 each)

ISSUE OF SHARES FOR PURCHASE OF ASSETS :

lf the shares have been allotied to any person or firm from whom the company has
purchased any asset. Then the journal entry will be :

Asset account Dr to share capital account (For shares issued in consideration of purchase
of an asset for the company)

ISSUE OF SHARES AT'PREMIUM :

lf a company issued shares at a price above the face value of shares then the shares
are said to be issued at premium, premium so collected shall be credited to a separate
account called securities premiurn account.

Journal Entries -

L lf the premium is paid with application money :

/a\ R2nk ancnr rnt

To share application AJc
(For share application money along with premium received)

(b) Share application account Dr

To share capital account
To share prernium A/c
(For share application money transferred to share capital and share premiumAc

2. lf the premium is collected with the share allotment money then:

(a) share allotment Ai/c Dr

To share capital AJc
To share premium AJc
(For share allotment and share premium received)

16
 (b) Bank account
To share allotment F/c
(For share allotment money received).

lf the securities premlum is received alongwiih the allotment money'

then the following
entries will be Passed :

(a) Share allotment tuc UT

To share caPital AJc

To share Premium li/c
(For share allotment and share premium money due on " "" " Shares)'

(b) Bank account Dr

To share allotment Fi/c
(For the allotment money received)

Example -3
AlphaLtdissued5000prefprencesharesofRs.l0eachatapremiumofRs.4per
(including premium)'
share payable Rs..1 per share on application, Rs. 6 per share on allotment
all money due
Rs.3 on first call and the balance on final call. The shares were all subscribed
'was on 1500
received except the first call money on 1000 shares and the final call money
shares.

Give the cash book and journal entries to record the above the transactions.

Solution

CASH BOOK
Receipts Arnount Payments Amount
(Rs.) (Rs.)

To preference share application (being preference

share application money received on 5000 share
of Rs.1 per share) 5000

To preference share allotment (preference share

allotment money received on 5000 shares
@ Rs.6 per share) 30000
To preference share 1"t call (For 1"t call money
received on 4000 share) 12000

To preference share final call (For final call money

received on 3500 shares) 14000 By bal c/d 61000

61000 61000

17
JOURNAL ENTRIES
AJo Dr' 5000
1. Preference share application
'To A/c
Preference share caPital
(forpreferenceshareapp|icationmoneylriansferredtopreferencesharecapitalA/c).
Preference share allotlnent A/c
Dr' 30000
2. 10000
To preference -snare capital A/c
20000
To share Premium AJc
on 5000 share Rs O per share)
(for preference share allotment money due
AJc Dr" 1 5000
3. Preference share 1"' call
To preference share capitalFi/c 15000
money due on 5000 shares @ Rs'3
per share )
ltoiprufur"n"" share l"tcall
Preference share final call AJc Dr' 20000
4. 20000
To preference snare capital A/c
' Rs:4 per share )
(for preference share final call dlte on 5000 shares @

ISSUE OF SHARES AT DISCOUNT :

TheshareissuedatapricebelowthefaceVa|ueiscal|edaSsharesissuedatdiscount
ForexampleifashareofRs.l0eachwasissuedatRs.Spershare,thenitissaidthatShares
were issued at a discount of Rs'2
subject to the.following conditions'
A company can lssue s^hares at a discount
i)Theissueofsharesatadiscountisauthorizedbyaresolutionpa$sedbythecompany
in general meeting and sanctioned by the
ceniral government'
of discqunt which should not exceeo
ii) The resolution must specify the maximum rate
higher percentage as the central governmeni
10% of the nominal value of shares of such
MaY Permit.
iii)oneyearmusthavebeene|apsedSincethedateatr,vfiichthecompanywasaa||owec
to commence business'
gi the section by the court'
iv) lssue must take place within two months after the da&

Journal Entry -
issue of thares at a discount at the time c'
The following journal entry is passed on the
allotment.
Dr
Share allotment AJc
Dr
Discount on issue g{-shares Alc
To share caPital lJc
(For shares issued at discount)

18
 Discounton issue of shares is shown in assets side of Balance sheet till it is writien otf
completely.

Exanrple .- 4

issuerj 10Ct00 slrares of Rs.10 each al a discount of 6% payabte as follows

Be ta L.td
. on
applicalion Rs.2.50, on altotment Rs.3.40 and on 1", and final call rs.3.50.

The application recDivecr were for g0000 shares arrd a of Urese were accepted.
A
mone'./ due was recetved except ihe first and final call on '1000 shares.

Pass necessary journal entries and Balance sheet of Beta Ltd.

Solution - Rs.
1 . Bank A,/c Dr - 225000
To share application A,/c
225000
(For share application money received on g0000 shares
@ Rs.2.50 each).
2. Share application A,/c Dr 225000
To share capital A,/c 225000
(For share application money on 50000 shares
@ Rs.2.S0 per share)
3. Share allotment A,/c Dr 306000
Discount on shares A,/c Dr 54000
To share capital A,/c
360000
(For share allotment money due on g0000 shares
@ Rs.3.40 per share and discount @ Rs.0.60 per share).

4. Bank AJc Dr 306000

To share allotment A,/c
306000
(For allotment money received on g0000 shares
@ Rs.3.40 per share)
5. Share first and final call A,/c Dr 315000
To share capital A./d 31 SO0O
(For share 1"tand final call money due on 90000 shares
@ Rs.3.50 per share)
6. Bank A,/c Dr 311500
To share '1"1 and final call A,/c 311500
(For share first a finar ca money received on 8g000 shares @ Rs.3.50 per share).
Balance sheet of Beta Ltd, As on
Amount (Rs.) Assets Amount (Rs.)
Llabilities
issued capital 100000 share ]
Cash at Bank Discount on
1000000 issue of shares 842500
@ Rs.10 per share
Subscribed caPital 90000
900000 54000
shares @ Rs.10 Per shares
Paid up capital 90000 shaies
@ Rs.10 Per shares 900000
less calls in arear 3500 896500
896500 896500

ADJUSTMENToFE)GESSMoNEYTowARDsTHEAMoUNTDUEoNA|-LoTMENT
AND CALLS

company
Mukesh L;9ll
luuKesll LrLissued 10000 shares of Rs'10 each but application for 20000
lPalry Ltd
and
shareswere.receivedbycompany.Thedirectorsrefusedtoapp|icanisof5000shares
prorate basis. In this case
applicants of 15000 shares were allotment the 10000 shares on
10000 2' fr
the ratio of ailotment of shares to applications is .i,e, shares.will
b: allo:ed
ffi = i against fiE
every 3 applications received and'excess application rnoney will be adjusted
shares allotment and on calls.
Example - 5
A company issued 500000 shares of Rs.10 each at a premium of Rs'4
per

payable as under :
onApp|icationRe.lpershare;ona||otmentRs.4pershareandRs.2premium;
Final payment Rs.S per share and Rs.2 premium' 'r

20
Solution -
JOURNAL ENTRIES

Bank AJc Dr.

To Share Application AJc

(Being Share Application money received on 63,000 shares
@ Re. 1 per share)
Share Application AJc Dr'

To Share Capital F,/c

(Being transfer of Share Application money on 50,00 shares
@ Re.1 each to Share Capital A/c)
Share Application Nc Dr.

To Share Allotment AJc

To Calls in Advance AJc
To Bank Nc
(Belng the surplus amount received on Share Applicalion
transferred to Share Allotment and Share Call and the balance
returned)

Share Allotment A,/c Dr'

To Share Capital AJc

To Securities Premium AJc
(Being Share Allotment money due on 50,000 Shares
per share)
@ Rs.4 per share and premium @ Rs.2
Bank FJc Dr.
To Share Allotment A,/c
(Being receipt of Share Allotment money)

Share First & Final Call FJc Dr'

To Share Capitral AJc

To Securities Premium Nc
(Being Share First & Final Call money due on 50,000 shares
@ Rs.S per shara and premium @ Rs. 2 per share)
Bank AJc
Calls in Advance
To Shdre First & Final Call A,/c
(Being receipt of share First & Final Call money, less
Rs.5,000 received in advance)

21
lllustration - 8
Acompanymadeanissueof30,000sharesofRs'l0eachpayab|eRs'3onapp|ication,
Rs.S on allotment and Rs.2 on call
allotments
93.200 share were applied for and owing to this heavy over-$ubscription
were made as follows:
Applicantsfor21,500(inrespectofapplicationsfor2'000ormore)receivedi0'2011
snares'
more but less than 2'000i
Applicants for 50,600 (in respect of applications for 1 '000 or
received 12,600 shares.
' 1'000 snares) received
Applicants for 21,100 (in respect or applications for less than
7,200 shares.
Cashthenreceivedaftersatisfyingambuntdueonapplicationwasappliedtowards
a||otmentandcallmoneyandba|ancewasthenreturned.A||moneydueona||otmentand
call were realized.
in the books of the
Write up the relevant ledger accoints relating to this issue of shares
company.
Solution -
EXceSSapp|icationmoneyreceivedonaccountofheavyoversubscriptionisutilizedas
follows :

22
 Ledger Accounts
CASHACCOUNT
'l-o
Rs. Rs.
Share Apptication on 2,79,600 By share applicalion Nc
it-1.200 shares @ Rs.3) 25,800
(Amount refunded to
appiicants)
17,100 By Balance c/d 3,00,000
Share Allotment A/c (A{lotment
'r1:,' rrv on 30.000 shares @ Rs.5 per
share less Rs.1 ,32,900 retained
:owaads allotment)
' " Snoru first and Final Call Account
/Cail money on 30,000 share
@ Rs.2
lr..:r share less Rs.30,900 retained
to\,,,i rC3 call.l 29,100
3,25,800 3,25;800
Tb Balance b/d 3,00,000

SHARE APPLICATION ACCOUNT

Rs. Rs.
To Share Capital Account 90,000 By Cash Account 2,79,600
To Share allotment Account 1,32,900
To Share First and Final Call Account 30,900
To Cash Account

SHARE ALLOTMENT ACCOUNT

SHARE FIRST A.ND FINAL CALL ACCOUNT

Rs. Rs.
To share Capital Account 60,000 By Share Application Account 30,900
By Cash Account 29,100
60,000 60,000

23
I!.."l

SHARE CAPITALACCOUNT

To Balance c/d Rs, Rs.

3,00,000 By Share Application Account 90,000
By Share Allotment Account 1,50,000
By Share First and Final Call AJc 60,000
3,00,000 By Balance b/d 3,00,000

CALLS INARREAR
lf any amount has been called by the company either as allotment or call money and a
shareholder has not paid that money, then the unpaid calls are called as calls in arrear.
lnterest on calls in Arrears :

lf therd is a provision in the articles of associalion, the company can charge interest @
the
5% p.a. on calls in arrear for the period for which such amount remained in arrear from
share-holders. The journal entry will be :
BankAJc Dr
To int. on calls in arrear A'/c
(For interest on calls in arrear received)
calls in arrear amount is deducted from called up A,/c in the liabrrnres side of the balance
sheet.
GALL IN ADVANCE :

. lf a share holder pays the uncalled money in advance alongwith a particular call money,
then such amount will be called as calts in advance and will be credited tq a seParate account
known as calls in advance as follows
Bank A,/c Dr.
To calls in advance A,/c
(For call in advance received)
Calls in advance A,/c is shown in the liabilities side of balance sheet'
lf the articles of association provides thgn intere$t on.calls in advance will be paid @
60/o p.a. for the period for which the company received the calls in advance amount'
Tt€
journal entry will be :
call in advance !i/c Dr.
To Bank A,/c.
lllustration - 9
On 1"' March, 1998 X Ltd. Makes an issue of 20,000 equity shares of Rs.10
payable as below ;
On application Rs.2; on allotment Rs.3 and on first and'final call Rs.6 (three
after allotment).

24
 App|icationswerereceivedfor26,000shai.esanddirectorsmadeal|otmentinfu|ltothe
money to the applicants for 6'000
applicants demanding ten or more shares and returned
shares.oneshareho|derwhowasa||otted40sharepaidfirstandfina|callwitha||otment
not pay allotment money on nls snares,
money and another shareholder alldtted 60 shares did
charge and ailow
l,r, *'n,"n* paid with the flrst and final call. Directors have decided to
in advance respectively according
interest, as the case may be, on calls in arrears and calls
entries in the books of the company'
to the orovisions of Table A. Give the necessary 'iournal

Solution -
Journal entries
FORFEITURE OF SHARES :

called by the
payment of aflotment money or any call money
. lf a shareholder deifaglts in
company,theboardofdirectorsmaydecidetoforfeittheshdresheldbythedefau|ting
of the company' After
given in Artictes of association
shareholder by following tne frocedure
will have no claim on the company'
the forfeiture, the defaulting shareholdpr
heads as under'
of shares is discussed under three
Accounting treatmeni on forfeitures

(1) Forfeiture of shares issued at par

(2\ Forfeiture of shares issued at premlum
(3) Forfeiture of shares issueC at discount'
Forfeiture of shares issued at Par :
his name rs
he ceases to be the member and
On forfeiture of shares of a sharehoHier'
removedfromtheRegisterofMembers.Tatalamount.ca||edonfo.rfeitedsharesisdebitedto
Amount called by the company is either paid or not pajd ty the
'Shar€ Capital Account'
shar6ho|der.Amountcalledandpaidisforfeitedandrecordedin.Shareforfeited(orforfeiture)
accounts to cancel
Amount called but not paid is credite{ to respeciive installmentF
Account,.
journal entry is as follows :
the amount in arrears' The
forfeited)
Dr' (Amount called up ort shares
Share Capital A'/c
(Amount called but not received0
To Particular Call A'/c
(or Calls'in-Arrears AJc)
(Amount catitid and received)
To Share Forfeiture AJc

lllustration - 19
final cat| @ Rs'10
A share of Rs.SQ each fi'rlly called
up is forfeited{or non-payment bf
(a)
\-/ is not opened'
per share' Assurrc calls-in-antFrs ac€9unis
toliiteo olfinal citl @ Rs'a
(b) 100 shares of Rqfo fuilv call.eq !p'are 1$on-pavment
iq 9peneo'
per share. Assume calls-in-arearslccpunt
first call
up' is forfeitgd for non-payJnent of
@
(c) A share of Rs.40 each, Rs'30 called
is openeo'
Rs.l0 per share' Assume calls-in-arrears account

(d)500sharesofRs.60each,Rs.50cal|edup,areforfe-rtedfgrnon-paymgnig$F||otment,
Rs.15 and Rs. 10 per share respective|y.
first ca|| and second call @ Rs,15'

zo
 Journal
Share Capital tuc Dr 10
To Share Final Call A/c 40
To share forfeiture fuc
(For forfeiture of a share for non-payment of final call @
Rs.10)
b. Share Capital AJc Dr 2,000 490
To Ca ils- in-Arrea rs A/c 1,600
To Share Forfeiture A,./c
(For forfeiture of 100 shares for non-payment of final call
@ Rs.4 per share)
Share Capital A"/c Dr 10
To Calls-in-Arrea rs A,/c 2A
To Share Forfeiture A,/c
(For forfeiture of a partly called up share for non-payment
of first call @ Rs.10)
ISSUE AND FORFEITURE OF SHARES .
.l Share Capiial A/c Dr 25.000 7.500
To Share Allotment A/c 7,500
To share first call A,/c 5,000
To share forfeiture A,/c 5,000
(For forfeiture of 500 partly called up shares on which
only application money is received)

Forfeiture of shares issued at Premium -

According to section 78 of the Companies Act, securities full premium can be utilized
::-Jy forfour specified purposes. lt means securities premium received by the company cannot
:e cancelled at the time of forfeiture of shares. Thus, the journal entry for forfeiture remains
under :
=
>'ure Capital Ai/c Dr. (Amount called up on account of share capital)
l: Share Forfeiture Alc (Amount received on account of share capital)
-: Respective Calls fuc (Amount not paid on account of installments demanded)

-'?irrever, when the amount of premium is called by the company, but not paid by the
---areholder, its treatment depends upon its recording as follows:

27
 oremium
o1lec-eipt basis' then non-payment of
(i) Receipt Bdsis : lf premium 5 leyOe{
of shares'
will not affect ihe entry for forfeiture
it is due' then
to securities premium account when
(ii) Due Basis : lf premium is transferred
Premlum
affects the entry for forfeiture of shares;
non'payment of premium amount company rs
premium account and not leceived
amount recorded in securities :'ln"
passing following entry :
time of forfeiture of shares by
"r.oulJ",". share capital)
Share CaPital A,/c Dr.(Amount called up on account of

Securities Premium AJc Dr' (premium recorded but not received)'

To Respective CallsAJc (Amount recorded as due but not received)

To Share Forfeiture AJc (Amount received on account of share capital)

lllustration - 20

Pass journal entries in the following

cases :

is Jorfeited for non-paymeni of

second and final
(a) A share of Rs.50 each issued at Rs'60
call @ Rs.15 Per snare'

(b).AshareofR.l00eachisforfeitedfornon.paymentofa|lotmentmoneyrs:50(inc|uding
premium rs.20) and first and final call Rs'20'
shares of Rs'40 each payable as follows
:

(c) A company invited application for equity

Rs'
On application 20 (including premium)
On atiotment 20

On first call 10
forfeitec
pay aliotment money and his shares were
Mr. X holding 500 shares failed to
before the first call was made'
payable as under :
(d) X Ltd. lssued shares of Rs' 100 each

28
 Journal

Share capital A,/c

To share second & final call A,/c
To share forfeiture A'/c 35
(for forfeiture of share due to non-payment of final call and
forfeiture of amount paid on accouni of share capital)

Share Capital A,/c Dr 100

Securities premium Ai/c Dr 20
To share Allotment A,/c
To first & final call A,/c 20
. To share forfeiture. A,/c
(for forfeiture of a share for non-payment of allotment
(including prernium) and call monev)
Share Capital A,/c Dr. 15,000
To share allotment Arlc 10,000
To share forfeiture A,,/c 5,000
(for forfeiture of partly called up share and forfeiture of
amount paid on account of share capital)

Share capital A,/c Dr

Securities premium Ai/c Dr
To share allotment A,/c 4,000
To share first & final cbll A,/c 4,000
To share forfeiture AJc 2,500
(for fodeiture of .100 shares, cancellation of premium
recorded and not reieived and forfeiture of amouht
received on account of share capital)

Alternatively, if premium is recorded on receipt basis, the Dr. ' 10,000

entry is :
Share capital A,/c
To share,allotment A,/c 3,500
To share first & final call fuc 4.,000
To share forfeiture Filc 2,500
Forfeiture of Shares issued at Discount -
for non-payment of installments called by the
lf shares issued at discount are forfeited
company, lne atlluullt ur utJ
comoanv.theamountofdiscountal|owedonforfeitedsharesiscance||edatthetimeof
Shares Account" lt is worth noting th€ , "69t,lni
forfeiture by crediting 'Discount on lssuo of sides the
.",,"Orponforf"itrOsharesisdebitedtosharecapitalaccountanditincludes'b€ E ntry is as
shareholders' the anrount of discount
amount of installnrents payable by the
under:
Dr. (Amount called up including disco unt)
Share CaPital AJc
(Amount calted but not received)
To ResPeciive Call FJc
To Discount on lssue of shares fuc
(Amount of discount)

To Share Forfeiture A'/c

(Amount called and received)

ISSUE AND FORFEITURE OF SHARES

lllustration - 21

Pass journal entries in the following cases

:

discount is forfeited for non-payment lf first and

(a) A share of Rs.10 each issued as 10%
final call @ Rs.3 Per share'
are forfeited for non-p ayment of
(b) 500 shares of Rs.20 each issued at 5% discount
allotment and final call money @ Rs'9 and Rs
5 respectively'

is forfeited for non-payment ol first call

of
(c) A share of Rs.50 each issued at 10% discount
call of rs'10 is made'
Rs-10 per share before the second and final
discount are forfeited for non-1 )ayment oi
(d) 100 shares of Rs.1000 each issued at 5%
call mgrl'ey @ Rs'20 per sha re. Second
allotment money @ Rs'20 per share and first
' forfeitult i of shares
^-.r a^^r ^^rr na'ahlo fd Rq ?0 ner share has not been made till the
nr 10
Share capital AJc
To Share first & final cal A/c I
To Discount on lssue of Shares AJc o
To share forfeiture AJc
and
(For forfeiture of a share for non-payment of final call
'' .. .J l:^^^...+\
' I ur utDvvsr r(,1
callgellatlul
Dr. '10000
h Share CaPital AJc
' To Share allotment AJc 4500
:
25m
To share fist call A/c
5m
To discount on lssue of shares AJc
zffi
To share forfeiture AJc
(for forfeiture of a partly called share issued at discount)

?n
 c. Share Capital A/c uf. 40
To Share first call A,/c
10
To discount on lssue of share A./c ,5
l-o share forfeiture fuc
za
(for forfeiture of a partlv called share issueri at discnr rnr\
d Share capital AJc Dr. 8000
To share allotment A,/c
2000
To share Flrst call A/c
2000
To discount on issue of shares A/c
500
To forfeiture:of share AJc
3500
(For for"feiture of par y called up shares originally issued
at 5% discount)

'Share Forfeited A,/c' in Balance Sheet

-
share forfeited account bara.nce is added to paid up capitar and
aggregate figure is
shown in the barance sheet. Arternativery, it may be
shown as separate items paio after up
sapital as shown below :

Sustration - 10

A Ltd. lssued 1,000 Equity shares of Rs. 100 each payable

as foilows :

Rs' 20 on apptication : Rs.25 on alotment ; Rs.20 on first

calr; Rs.30 on finar cafl.
900 shares were appried for and afiotted. AI moneys were
- received with the exception
:f Lre first and final calls on 20 Equity shares herd by Bose. Theses
shares were forfeiter,,.,,,
:re Directors of the company.

Give the Journar and cash Book entries in the books of

the company to record the
=oove transactions.

Solution

24
 JOURNAL ENTRIES
Rs. Rs.
Dr. 22,500
Equity share aPPlication AJc
22,500
To Equity share capital PJc
capital
(being transfer of Application money to equity share
A r^\
Drr 22,500
22,500
900 shares @ Rs. 25 Per
share )
Dr. 18,000
Equity share first Call AJc
18,000
To EquitY share caPital AJc
(being share 2nd & final call money due on 900 shares @
Rs.20 per share)
 27,000
Equity share 2nd & final call Fiic
27,000
To equity share caPital A'ic
(Being share 2nd & final call money due on 900 snares
@Rs.30 per share)
Dr. 2,000
Share capital AJc
4000
To share first call AJc
600
To share 2no.& final call AJc
1,0c0
To share forfeited A,/c
per
(being forfeiture of 20 shares on which first call @ Rs 20
share and 2nd & final call @ Rs'30 per snare was
oulstal lull l!-l d5
,ri^h
ll rs I soviurrvl ^f rha Rr|erl of I)irectofs)
RE.ISSUE OF FORFEITED SHARES :
the forfeited shares' Sh€rre
After for{eiture qf shares company may decide to reissue
canbereissuedatpar,atpremiumoratdiscount.Forreissueofsharesat'parorprgm|um'
reissue ol shares
journal entries discussed earlier for issue of shares are passed' However
atdiscount,maximumdiscountisrestrictedtotheamountforfeitedontheseshar€sp|usthe to
less than the amount credited
original discount, if any. So reissue price should not be
less the amount forfeited on those
share capital as called up and paid up, on reissued shares
shares and the original discount if any'

Journal Entry for reissue of forfeited shares -

tsank A/c Dr
Discount on issue of shbres AJc Dr
Share forfeited AJc Dr (for discouni on reissue of forfeited shares)
To share capital AJc
To share premium A/c (oremium on reissue)

Transfer to Capital Reserve -

forfeited AJc (i'e the difference
After re-issue of forfeited shares the balance ot share
the tirne of forfeiture of shares and the
Detween credit balance of sharaforfeited AJc found at
debitba|anceofshareforfeitedA,/cfoundattheiimeofre.issueofforfeitedshares)isanet
is transferred to capital reserve
:ain on forfeiture and reissue of shares is a capital proflt and
as follows : share forfeited AJc Dr.

.o Capital Reserve AJc

ifor closing the share forfeiture Ai/c')
lllustration - 22
Give iournal entries in the following cases :
(a) A share of Rs.50 each forfeited for non-payment of final call 9f Rs.10 per share i:

reissued for Rs.50'

(b) A share of Rs.50 each forfeited for non-payment of final call of Rs.10 per sharc i{

reissued for Rs.4O. credited as Rs.40 called & paid up.

(c) A share of Rs.20 each forfeited for nor;r-payment of allotment and final call @ Rs 11
and Rs.5 per share respectively, is reissued for Rs.25.
(d) A share of Rs.20 each fqrfeited before final call of Rs.5 for non-payment of first cail o
Rs.5 reissued for Rs.20 credited as Rs.1 5 paid up.
(e) A share of Rs.10o each issued at 1070 discount is forfeited for non-payment of frrsl I
final call of Rs.20 and is reissued for Rs'80 credited as fully paid up.
Journal
Share capital AJc
To final call Alc . 10

To share forfeiture AJc 4A

"?
lor lonetture ol snarel
Bank AJc
To share capital Aic 50
For reissue of share at
Share forfeiture AJc
To capilal reserve AJc
for transfer of net
Share capital A'/c'
To share final Call A/c
To share forfeiture AJc
(For forfeited of a shdre due to non-payment of final call)

Bank A"/c
To share capital A/c
reissue of forfeited share ai
Share forfeitu re A,/c
To Capital reserve A/c .
(For transfer of gain on forfeiled and reissued share to capital

Share capital fuc

To share allotment AJc
To share first and final call A/c
i To share forfeiture AJc
or forfeiture of a share

AA
 Bahk A/c Dr. ZJ 20
To share capilal AJc 5
To securities premium fuc
(for reissue of a share al Prei
r--
I
Share forfeiture A/c Dr. E

I
To capital reserve 4'/..c,
(for transfer of net gain 10 capital reserve)
d. Share capital AJc Dr. 't5
To share first call A,/c 5
To share forf6iture 4Vc 10
(For forfeiture of partly qalled share )
BANK IVC ur. 20
To share capital. A,/c 15
I o secunues prqmlum-lvc 5
{for reissue of a share as partly paid-up and at a prelryulqL
Share forfeiture A/C Dr. 10 10
To capital reserve AJc
(for transfer of net gain to capital reserve)
Share capital A,/c Dr. 100
To discount on issue of share A'/c 10
To first and final call AJc
lo snare lonerture lvq r 70
(for iorfeiture of share issued at discount)
Bank A,/c Dr, 80
'10 100
Discount. on issue of shares fuc
Share forfeited A,/c (Bal?ncing Figure) 10
a l^ '
^^-:r^r /"!
I u srrdrri udPrrdr r.
(for reissue of share involving reinstalement of original
discounl)
Share forfeiture A/c Dr. 60
To capital reserve fuc bU
(For transfer of net qain (70-10) to capital reserve)

Partial Reissue of Shares -

Somelimes, atl the forfeited shares are not reissued in one lot. lf the number of shares
ieissued are less than the number of shares forfeited, it is known as partial reissue of shares.
in case of partial reissue of shares, amount of net gain to be transferred to capital reserve rs
, :dirrl r!3ted. as Under :
Amount to be transferred to Capital Reserve =

Proportionate Amount Forfeited on . Amount of Discount on Reissue debited

Reissued Shares to share Forfeited AJc

for non-payment of final call of Rs'2

For example, if 100 shares of Rs.10 each are forfeited
pershareandon|y40sharesarereissuedforRs.280,amounttobetransferredtocapita|
reserve is calculated as follows:

Amount forfeited on 100 shares =100x8

Proporlionate amount forfeited on 40 shares = (40/100 x iloo)

Discount on Reissue of 40 shares = (40 x 10 - 280)

to capital reserve)
Net Gain on Forfeiiure and reissue of 40 shares (transferred

Notethattheamountforfeitedonremaining60shares(60/100x800,ie',Rs'480)shall
At the time of reissue of
remain in share forfeited accdunt iill these shares are reissued.
transferred to capital reserve
these shares, net gain on these shares shall be calculated and
account.

Sometimes,shareshe|dbymorethanoneshareholderareforfeitedandreissued.To
calculategainincaseofpartialreissueofsuchshares,sharestobereissuedaretakeninthe
shares held by Mr' X and
order in ,rJfri.n tf,"y are forfeited. Suppose, a company forfeits
' subsequentlY shares held bY Mr.

lllustration - 25

XLtd.lssuedforpub|icsubscription60,000sharesofBs.l0eachatapremiumofrs.2
per share payable as under :

Rs.
On aPPlication 2

On atlotment 5 (including premium)

On first call 2

On second call

App|icationsWerereceivedforg0,000shares.Ailotmentwasmadepro-rataiothe
app|icationforT2,000shares.Theremainingapp|icantsWererefusedal|otment.EXceSs
money received on application was adjusted against allotment money'

X to whom 3,000 shares were allotted failed to pay both calls'

These.thu:" *ut"
to z as ful:i:
subsequentlyforfeited and 2,000 shares out of forfeited shares were reissued
paid up at Rs.7 per share. Pass journal entries'
 Journal
tJANK A/C
Dr. 1,80,000
1,80,000
To share ,a pplication A/c
(For applicition money ! ceived on 90,000
Dr. 1,80,000
Share Appli,cation A/c
1,20,000
To share ca pital A/c
24,000
To share allotment A/c
36,000
lo LJanK A/c
fFnr rlisnnlqition ol aoolication monev received)
Share Allotment A/c Dr. 3,00,000
1,80,000
To Share Capital A/c
1,20,000
To securities Prem ium A/c
(For allotment money due inc!!4jlg-EgtnjgD
Bank A/c Dr. 2,76,000
2,76,000
To sh d€di*J.dm e nt AJo
{For allotment monev received 3,00,000 '24'OO0l
iI Share first call A/c Dr. 1,20,000
'1,20,000
1 To share capital A/c
: ,F^r fi.ct aal mnnav drre\

Bank Alc Dr. 1;14,000

Call-in-Arrears A/c Dr. 6.000
1,20,000
To share first call A/c
/trnr fircf ^a rn^nav roccivcd n,nel arrear of all mOne
Share second and final call A/c
nr 1,80,000
'I,80,000
To share capital A/c
atr^r .d^^h.| h^nav .lt|€\
^.ll
Dr. 't ,71 ,000
! Bank A/c
' Calls- in-Arrears A/c Dr. 9,000,.
1,80,000
To sharesecond and final callA/c
ri^. c6^^tu* ^.il rh^nav racpive.l and arrears of Cal mone
$5s1s gspilal A/c Dr. 30,000
'15,000
To ca lls-in -Arre a rs A/c
15,000
, To share forfeited Alc
I /Fnr fnrfpilrrre of 3 OOO sl
Bank A/c Dr 14,000
r 'rt{. ., Dr 6,000
Sna re Tonelteo A/c
To share iapital A/c 20,000
Jfnr iccrro , nnn chr.oc Rs 7 oer share
^f
Dr. 4,000
I Share fotif{pd A/c
4,000
, To capit{reserve A/c
: iFor transfei of net gain on forfeiture and reissue of 2'000
'shares)
 Amount forfeited on 3,000 share = Rs 15'000 2'ooorl5.ooo=
lo,ooo
Proportionate amount forfeited on 2'000 share 3,000
6,000
Less : discount on reissue of 2;000 shares
Rs.4,000
Gain on forfeiture and reissue of 2,000 shares

lllustration - 26
each payable as follows
PQ Ltd. lnvited application for 20,000 shares of Rs 20
:

q,

On application i; 10 (including Rs.6 Premium)

On allotment 10 (including Rs.4 Premium)

On first call 5

bn'second call

Mr.Xho|ding1,000sharesfai|edtopayal|otmentmoneyonhissubsequentfai|ureto
paycallshisshareswereforfeited.Anothershareho|ders,Mr.Yiowhom500shareswere
also forfeiled. out of the forfeited shares'
artotteo, failed to pay both calls and his shares werg
l,200shareswerereissued@Rs.lspersharecreditedasfu||ypaidup.
Pass journal entries for forfeiture and reissue'

rssuEAND *:::ll:,-t oF SHARES

Dr. 2,000
Share Capital PJc
ur. 4,000
Share premium A,/c 10,000
To share allotment AJc
5,000
To share first call A,/c 5,000
To share second call AJc 4,000
T,.' chrra {^rfailt tra A/c
Dr. 10,000
Share capital A/c 5,000
To calls-in-Arrears AJc
(First call Rs.2500 and second call Rs'2500
15,000
To share forfeited AJc
tfor fnrfei| rre of 3.000 shares)
Dr. 21 ,600
Bank AJc
Dr. 2,400
Share forfeited AJc 24,000
To share caPital A/c
/Fnr icqr re of 2.000 share (O Rs.7 per share)
Flr 3,600
Share forfeited A'/c 3,60c
To capital reserve A/c
(For transfer of net gain on forfeiture and reissue of 2'000
shares).

?R
 Rs.
Amount forfeiied on :
4,000
1 ,000 shares of Mr'X
5,000
500 shares of Mr' Y
shares 2,4A0
Discount on Reissue of 1 '200
irr'cportionateamountforfeitedonl'200sharesreissued: 4,000
On 1'000 shares of Mr' X
2.000
On 200 shares of Mr' Y
| 1r n\ \ 6,000
I .--:"- x i.000
\s00 I
)

fis'3'600
on Forfeiture and Reissue of 1'200 shares = 6'000 - 2'400 =
Flet Gain
account is iess
application money transferred to thare allotnlent
Sometimes, excess that
including premium' ln that case' it is strggested
tir.rn the amount due on atoiment' left
of share capital and anyexceis
excess is adjusted torffards;;;;;""-account surplus may be
payaore.on allotment' Alternaiively'
t"*"d;;;;m
thereafter is applied account of share capital'
o*, ,"*"'atp'u*i" ['""'unO tnun uguintt amount due on
"npu"o
REISSUE OF FORFEITED SHARES
i '
lllustration - 27
of Rs 10 each
on pro+ata basis to appricants for 50,000 srrares
20,000 shares issued
par/able as follows :
Rs.

On apPlication
6
On allotment
Orr call
to PIY allotment and on
his
appliod for 50 shares' tailed
A shareholder who nas
his shares were forfei(ed'
subsequent failure to pay call money
of shares'
!:ass a journal entry {or forfeiture

Working Notes :
Not Paid on Allotment
A. Calcutation of Amount
50
Share aPPlied
50 x 3 =Rs.150
Ai'plication money Paid

?o
 2o,o0o '^^
Rnw +=av
,'"
Shares allotted ^ s0,00q
Aoplication money on allotted
shares 20 x 3 = Rs 60

150x60=Rs'90
Adjusted against allotment

Allotment moneY due =20x6=Rs.120

90
Less adjusted
Rs' 30
Allotment money not receiyed (120:90)
Money
B. Adiustment of Excess Application
premium
(Rs.30) is iess than the arnourrt of
Amouni in arrear on account of alloiment Rs'30) is
t:1h".:I*1 of Rs'10 (ns
due on twenty shares (Rs'40)' lt means premium iO' only
out of Rs.150 paid alongwittr afolication
already received and cannot'b" ""n""rr"a.
share capitaland.the balance Rs'150 - Rs'140' i'e'
Rs.140 (20 x 93 + 4) ls aOiustel-against
recelveo
Thus' at the.time of forfeiture amount
Rs. 10 is adjusted towaros p'"tlrn due' Rs' 10) is
is forfeileo *u i**nt of premium not received (Rs'40 -
against share capital "ni
cancelled as under :
$. rAJu
Share Capital FJc hr 30
Securities Premium A/c 30
To share allotment AJc 60
To share first and final call A'/c 140
To share forfeited PJc
(Forforfeitureof20sharesandcance|lationofpremiumr]ecordeo
I
but not received) -

'Alternatively, it may be assumed that exeess

appiication t:t:y
t:'uo'*I"^t-adjusted
capital
baleqge (Rs'50) 'isr-ap'plied to*qrdlfhare
against premium due (Rs'aO!"nJ tnt
the journal entry for fqrfeiture is
all
instalment due at the time of allotment' In tfr;t case'
follows :

.Dr. 2W
Snare CaPital li/c 301
To share allotmentili/t 601
To share first and final call A'/c ft0
To share forfeited Ar/c
paid.€{|d
(For forfeiture of 20 shares and forfeiture of amount
+ Rs'50) I
applied towards share iapital, i'e', Rq'60

40
PRACTICAL PROBLEMS

lssue qf Shares

1.

2.

Rs.

Qn application 25

On allotrnent 20

First call
Final call

4.

Rs..4 On first

were ieceived
There was gversubscription and applications
Allotment of shares was made as under
:

41
 To applicants of 1,50,000 shares I'50'000 shares

To aPPlicants of 25,000 shares

Nil

To applicants of 1,85,000 shares 50'000 shares

Excessmoney'paidonapp|icationwasadjustedagainstsumsdueonal|otmentanrl
first call. All moneys due were received'

Give journal entries, ledger accounts and Balance

Sheet'

Ans. [B/S Total Rs.22,00,000]'

5.Ye||owLimitedofferedforSubscription3'00012%preferencesharesofRs'100eachat
was payable as follows :
a premium of 20o/a on 1"t January, 1998' The amount

,On APPlibation Rs.20

On Allotment Rs.40 (including premium - due on 1"tFeb')

On First call . Rs.30 due on 1"t March

On Second call Rs.30 due on 1't MaY

A|lthesharesweresubscribedbythepub|icandsubscription|istwasclosedon?5'|
days after-the due dates'
January, 1998. Money due on allotment and calls payable 15
on 200 shares
All the amounts were duly received in time except the second call
and show them in the
Prepare Journal and Cash Book in the books of the cotnpany
Balance Sheet.

Ans. [B/S Total Rs.3,54,000]

in 5,000 equity shares
6. The authorized capital of Janata company Limited was divided
. of Rs.100 each. The company had issued
4'000 equity shares in the year 1993' On 1"
January,lggSthedirectorsofthecompanyhavedecidedtoissuetheremainingshares
:at 10% discount. lssue is to be made in the followlng manner:

On Application Rs.25. Last date of closing the list 25th January'

On Allotment Rs.25.Due date 1"' February and date of receipt 1sth February.
onFirstCa|lRs,20.Duedate1$Apri|anddateofreceiptl5|iApri|
onSecondCa||Rs.20duedateldJuneanddateofreceiptl5|hJune.
money wi$
Shri Dinesh to whom 100 shares were allotted, paid allotment and first call
per Articles o
second call. Other shareholders paid their dues at appropriate time' As
association, company charges interest ai 5% p'a' on calls-in-arrears'

4Z
 Sheet of
and show the relevant accounts in the Balance
entries
Give n':cessary-journal
the conlPanY'
331
m Cal]-rn-Arrears
Rs 58 33; B/S Total Rs'5'00'058
Ans. llnterest
Re'issue of Forfeited Shares -
Forfeiture of Shareg and
of shares :
the forfeiture and re-issue
7. Give journal entries for
fi''l had paid appircation
of Rs'10 each Rs'7 called up' on which
(a) X Ltd. Forfeited 20 sbares these 15 shares were reissued
share' Out of
to N as
and ailotment ton"' oiO' Oer
U
share'
ftrllY Piid uP for Rs.6 Per

were re-issued to M as
tb)XLtd,forJeitedl0snaresofRs'10each(Rs'6calledup)'issuedatadiscountofl0%
n'2 p""h"'"' Of these 8 shares
to n on which t'" nuo puiO
share'
Rs.8 calleo uP' for Rs'6 Per

(c) x Ltd Firret:e-1:'^:i:JT 'll;,l"ii,!][J",iTii:["":::

allotrnent money ol r llli;l?;TiJ::',"^i::
share.
of 10% held
shares of Rs 1'O'each issued at discount
equity
(d) Grewal Ltd' Forfeited 100
bvRaniitKauronl'''';;;t";;n-paymentatlhefirstcallofRs2pershareandthe
frnat call of Rs 3 Per
share'
fully paid)' Pass
to Ajit Kaur at Rs' B per share 9as
reissued
Oui of these' 60 snare were
r ;iltDSSary iournd entries'
s; (c) Rs'30 (d) Rs"lB0]'
to Capita{ Reserve (a) Rs'15; (b)Rs
Ans. [Amount iransferred ln

-8. The tlindusian lvlanufactlrring

tv
"no'"u
otl:f;;#::I*
Limited had

fr:'*:
a^total-subscribed

5: ; ';:
;:;f
capital of Rs'10'00'000

:J$::ili
:::i'"il' x;
"qJ
made and all amou per share
were forfeited and re-issued at Rs'8
Theso shares
shares held by D'Roy of
(including that of'cash) necessary to record transactions
Make the journal entiies shares
and reissue of forfeited
{inal cal, forfeilure oitft"'"*
to Capital Reserve Rs'3001'
Ans. [Anrount tratisferrerl of 5 per cent
10'000 shares of Rs'100 each at a discount
for
S. A ltd. Inviied apptrcations
PaYable as
iollows :
final call Rs 36'
Rs'25; On allotmont Rs'34; On first call and
On application
were accepted' All
were {or 9'000 shares and all of these
The applications received

43
 were
first and final calt on 200 shares which
moneis due were received except ihe
rs'90 as fully paid'
forfeited' 100 shares were reissued @
Also
are required to pas entries in the Cash Book and Journal of the company
You
reflected in the company's Balance Sheet'
show how thesb transactions will be
to Capital
Total Rs'9'01'300; Amount transferred
Ans. [Cash Balance Rs 8,56'800; B/S
reserve Rs.5,4001
Ltd. lssued 1,00,000 equity. shares of
Rs.10
the directors of ABC
10. on 1"tAprir, 1gg7
and the
at Rs.12 p", puyuUle as to Rs'5 on apblication' rs 4 on allotment
each
"nu" .
balance on 1"rJulY, 1997

Thelistsclosedonl2rnAprii'1997'bywhichdateapplicationsforl'40'000shareshad
Rs'1'20'000 was
Rs'80'000 was returned and
been received. Of the cash received' April'
the balance of which was paid on. 19th
applied to the amount due on ailotment of one
1997. All shareholders O"'O call due on 1"r July 1997' with the exception
'n" forfeited on 30th November and reissued
allotted for 1,000 shares' These shares were
1998'
as fully paid at Rs.B per share on 2no;3ng3ry
company recording the above transactions'
Pass journal entries in the books of the
Rs'5'0001'
Ans [Amount transferred to Capital Reserve
'll..MLimitedinviiedapplicationsforl,000sharesofRsi00eachatRs'120'payableastowav
'' on applicatio-n' Rs'40 on allotment' and
the balance bv
;t:;; Giroing p'"tiutl
of call.
The Board of Directors alloYl
Applications for 1 ,200 shares were received' !l':j'' '
of the shares pro-raia to ihe remaining
applicants tor ZOO ,f'tur.e', unO ili) tf'tu Ouf"nce
apPlicants.
money' if any' towards the allotment
The Board atso utiliied the excess application
money.

12.

44
15.

45
 subscribed for by the pubric at-par' Rs.2 per
share being payaore on apprication
Re 1 per share on airotment. A first ca, of Rs.2.50 per and
shJre was due on i March
a second call of Rs.2 per share on 1'r may. ", ano

on 31"'Decemb er, 1gg7, position as regard to shares

subscribe. by the pubric was as

No. of shares Amount paid per share

Rs.p
8,900
7.50
60
30
10
2.00
on 31"t December, 1 gg7 at shares
on which ress than Rs.S.50 per
share had been paid
were forfeited.

On 2B'n February l gg8 the arrears on

shares were collected.
on 1"r March, 1 gg' the forfeited shares were
r'eissued to Goenka at the
per share. The shares were - -' { '|v price
v' 'vu u'
of Rs.g.50
| \n.o uu
reissued as fully paid uo.
on 1"rAprir, lgg' the directors made a flnar
ca, of Rs.2.50 per share, payabre
June. The amdunt was on 1s
duly received,
Draft Journar entries to record at
the above rransactions. cash transactions
passed through Cash book. are to be

Ans. [Rs.50 transferred to Capital

Reserve; Cash Balance Rs.90,0501.
lo. . A Ltd. Co. had its lssued
Capital \,vr I rPr rurr rg or ZU,UUU
payable as :
^^h^.i^i^^ bquity Shares of Rs.10 each

Rs.3 on Ailorment (including prem.);

Rs.3 on 1"rCail and Rs.3 on
P,:"1 ilioo',*tion:
The shares were called upto
the 1",call stage. All the share
from A, hotding soo snares, wno paid
400 shares, who paid upto Atotment.
onty uptoAppti""ti".:;:"J"::;;:ff:rT::j,j
A, these sharu" u* ro.r"it"o. out
snares' 400 shares (whore of As of these forfeited
hordings ano oatance or g.s hordings)
to c' on payment of Rs'6 per were re_issued
share and as paid up to the same
extent as other shares.
Journalise the entries for forfeiture
and re_issue onlv.
Ans. [Amount transferred to Capital
reserve Rs.600].

46
 SHARES
REDEMPTION OF PREFERENCE

Meaning of Preference share -

payment of
preferential rights over the equity share in respect of
The shares having
iiividendandrefundofcap|:alatthetimeofliquidationofthecompany.
Meaning of redemPtion -
capital to the
preference shares means returning the preference share
Redemption of during the life
eltnerlt a fined date or after a certain time period
preference share holders Act'
as per the provisions given under section 100 of the companies
time of the company
1956.
to its
100 ot the Companies Acl' a company is not allowed to return
Under section
shareholdersthesharemoneywitnoutthepermissionoftheCourt.Butpermissionofthe
shareholders.
is to be made to the preference
court is not necessary, ii tn"'rJru.c
pard
issuing redeemable preference shares' it:s
When the capital is raised by lo-:e
period whether the
after the expiry of stipulated
back by the company t" """n 'nuln'der-s be paid back
wound up or not Ordinarily' the amount of such shares will
company is to be
or proceeds of the issue of fresh
out oi ihu
during the life time "'i*r ,profits- preference shares
"' ""tp"'U' provisions regarding the redemption of
shares. The following
'*p#nt Companies Act'
are given under section 80 of the
panrv
fullv paid up' In other words
(i) Such shares cannol oe redeemed
'i'T:,:n:l^:::
This provision is made in order
to protect the
paid-up shares cannot be redeemed'
interest of the creditors'

(ii)Suchsharescanoeredeemedeitheroutofprofitswhichwouldb.eavai|ablefordividend
oroutoftheproceeosofafreshissueofsharesmadlwiththeobjectofredemption.
issue of debenlures or
out of the proceeds of fresh
These shares cannot be redeemed to erosion of
property of the company as it wifi read
out of the u," oro"""l" of any forfeited account'
Capitat profits such as shares
. available security -tn" l'"0'to*' premtum
redemption reserye account' securities
development rebate account' capital for dividend' lf
capital reserve are not available
account, profit prior to in"o'porution' be provided either
premium, then such premium must
shares are to be redeemed at
outoftheaccumutaiedprofitsofthecompanyoroutoftheoompany'ssecuritiespremium lf
capital reserue are not available for dividend'
account, profit prlor to incorporation'
be provided either
premium, ihen such premium must
shares are to be redeemed at securities premium
the company or out of the company's
out of the accumurared profits of amorlnt of
woro 'proceeds' implies the amount received excluding the
account. The
 securities premium if the shares are issued at premiurn but the net amount if the shares
are lssued eitlier at a par or at a discount. This clause is inserted in order to protect the
interest of the creditors.

(iii) When shares are redeemed out of profits available for distribution for dividend, a sum
equal to the nomindl amount of the shares so redeemed must be transferred out of
. profits to a reserve account to be called 'Capital Redemption reserve Accounf. This
provision is made in order to immobilize profits from being used for any other purpose
SuchaSdecIarationofdividend,redemptionofdebentures'etc',
(iv) Such reserve can be used for issuing fully paid bonus shares to the shareholders. This
account cannot be reduced except in accordance with the sanction ofthe court relating
to reduction of share capital.

(v) Redemption of preference shares should nol be reg arded as a reduction of the authorized
capital of the company and as such the reduced shares should remain part of the '
authorized capital and musi be shown in the Balance Sheet.

. The purpose of the all legal restrictions on redemption of preference shares is not to
allow redemption of preference shares which may adversely aifect the security available to
the creditors of company. The purpose is to keep the security intact which is available to the
creditors even after the preference shares are redeemed. Section B0 of the Companies Act
provides that redemption of preference shared can be made either out of the profits of the
company which would be available for dividend or out of the proceeds of a fresh issue of
shares. lf redemption is carried out in any other manner such as out of bonowing or by sale
of available assets, it will reduce the amount of available security !c the creditors..lt is not the
case when redemption is made out of proflts because creditors'are not affected as the inbrease
in profit would result in an increase in the available assets t-r[ the company. Similarly, when
redemption is carried out of fresh issue of shares, it reiults in an increase in the available
assets and amount of security available to the creditors will not be affected after the redemption
of shares is made.

Another objective of legal restrictions pn iedemption of preference shargs is that there

should be no reduction of share capital. li has been ensured by the following provisions of
Section 80 of the Companles Act.. .

(a) Preference shares can be redeemed either out of the proceeds of the fresh issue of
shares or out of profits available for dividend purposes. li preference shares are
redeemed out of the proceeds of fresh issue of shares, capital provided by fresh issue
of shares will be substituted by the capital which will be reduced by reJemption of
nroforanno charoc

48
 purposes'
out of ievenue profits available for dividend
(b)Hfl"f redeemed
i'"",,'JTil,il:"J;:"*".;,_T:"j::l::::[::J,ffi':}i1,5"01"":J.'""
Reserye Account is
just like capital bec€use it
Reserve Account' t"Oi"'
*Ot'*t'on of preference
t' oonu"'nures' Hence' redemption
can only be used "'"J't'*'ojillup
to reduction of capital'
shares will not amount
to or less th€n the
shares to be redeemed'must be equal
Nominal value of preference fresh shares if any) of
fresh issue of shares
O'"""' "t 'tt'e of
oaid up value (deducting of fresh issue of shares
i.e., total of pai d up value
and capital Redemption
*""."#o"."r.t of profits available for
reoemptiol is carried out
andcapitat redemption preference shares
'"':;;""';;;;1it
na' iJ in anll case /ess fhan the no'minal value of
dividend purposes) must
b be redeemed'

for Solving Problem -

, Accounting Entries or Procedure up or parlly paid
preference shares are fully paid
the redeemable preference shares cannot
. First you see whethef
up as partty paio up
1

up. lf partlv ot'o

'o
*ji] iil;"t''t ft
be redeemed'
'l call lJc ' Dr'
trl Preference share final '

To Preference share
caPital F/c
.
call due)
(For preference share final
Dr'
(b) Bank A/c
call AJc
To Preference share final
call money received)
{For preterence share final

49
 Amount due to preference shareholders on redemption :
Redeemable preference share capital A,/c Dr. (with face value)
Premium on redemption AJc Dr, (with premium on redemption)
To preference shareholders A/c (Amount to be paid on redemption).

3. lt equity shares is issued for the purpose of redemption of preferences shares l

Bank A/c Dr. (with amount actually redemption)
Discount on issue of shares All Dr. (if shares are issued at discount)
To equjty share capital (face value)'
To share premium (if issued at premium)

,1
Premium on redernption of preferences shares is provided out of share premium A,/c. or
profit and loss A,/c or general feserve.
Share premium A/c Dr.
Profit and loss AJc Dr.
General reserve A,/c Dr.
To premium on redemption.

5. Sufficient amouni from proflt and loss A,/c or General reserve or any otner reserve
available for the distribution of dividend should be transferred to capital redemption
reserve A/c required for the redemption of preference shares :
Profit and loss A,/c Dr.
General reserve A,/c Dr.
To capital redemption reserve A,/c.

6. lf sufficient cash and bank barance is not avairabre for making payment to preference
shareholders on redemption then either current assets.may be sold by the company
or
bank loan may be arranged. The entries will be as follows :

(a) lf current asset is sotd

Bank A/c ut.
Profit and loss AJc Dr. (less on sale of current asset)
To current Asset
To profit and loss A,/c (profit on sale 6f .current assets)

(b) if bank loan is obtained for redemption'

Bank A/c Dr.
To Bank loan A,/c

7. lf redemption of preferences share$ is made by conversion of some other

shares, then
preference share capital fuc; Dr.

50
 holders
lf,payment is made to preference share
Preference share holder F/c Dr'
To Bank AJc

Exampla -
of Rs'10 each fully paid are outstanding
10,000, 7% Redeemable preference shares shares on 1"'
on 1"rJanuary
.1997 in a The company decid:d to redeem these
"orpuny. provide for redemption the company decided to issue
March, 1997 at Rs.13 p""nui"' io
5000equitysharesofRs.l0eachatRs.l4eachpayab|einfu||on20.hFebruary1997.The.
profit and toss Lrc showing a credit balance of
Rs.100000.
Rs. Rs.

Ans. (1 ) Preference snare capital A'/c Dt t

'!9'::: !:
Premium on redempiion A/c Dr' 30'000^ 4^ Ar
AJc ^ '30'000/-
To preference share holders
on redemption)
(for Amcjunt due to preference shdre holders
70,000/-
(2).Bankl/c Dr'
50,000/-
To equitY share caPital AJc I 20,000/-
To securiiies Premium Nc
(for issue of 5000 equity shares ai Rs'14 each)
Dr. 20,000/-
(3) Securities Premium AJc
10,0001
Dr.
Profit and loss AJc
To premium on redemption AJc
share
(for adjustment of premium on redemption against the
premium and profit and loss A'lc)' l

Profit and lossAJc Dr 50'000f

4) -- ^^^,
50'000/-
To capital ledemption reserveFJc
redemption of preference shares)
(for capital redemptlon reserve created for the

(5) Preference share holders A/c Dr' 1'30'oo0/-

1'30'ooo/-
To Bank P,/c
(for payment made to preference share holders)

Example -3
given)' Exchange Ltd' Has an issued
(Where number of shares of fresh issue are not
Shares of Rs 100 each and 4'500 Equity
share Capital of 650 7% Redeemable Preference
are redeemable at premium of 7y2 o^
Aprtl 1'
Shares of Rs'50 each. The PJ"renc" Shares
1997. The Company's Balance Sheet as on 31't
Marih' 1997 was as follows :

51
 Liabilities Rs. . Assts Rs.
Share Capital Fixed Assets 3,45,000
lssued 650 7% redeemable Investments 18,500
Preference Shares of Rs.100 Balance at Bank 31,000
Each fully paid 65,000
4,500 Equity Shares of Rs.50 each fully pad 2,25,000
2,90,000
Profit and loss account 48,000
Sundry creditors 56,500
3,34,500 3,94,500
In order to facilitate the redemption of the preference shares, the company decided (a)
to sell all the investments for Rs.16,000; (b)to finance part of the redemption from company's
funds, subject to leaving a balance of Rs.12,000 in the profit and loss account, and (c) to
issue sufficient equity shares of Rs.50 each at a premium of Rs.13 per share to raise the
balance of funds required.

The preference sfrares were redeemed on the due date and the issue of equity shares
waS fully subscribed.

You are required to prepare - (i) the necessary Journal entries to record the above
transactions (including cash) and (ii) the Balance sheet as on comptetion.
Solution
Exchange Ltd.
Joqrnal
Rs.
Bank A/c Dr.
Profit and loss A/c Dr.
To inv€stments A/c 18,500
(Being the investments at Rs.16,000 loss debited
profit and loss a ccount)
'.

7% Red. Preference share capital A/c Dr. 65,000

Premium on redemption A/c Dr. 4,87.5
To preference shareholders A/c
(Being the amount payable on redemption of 650 preference
shares transferred to prefereQce shareholders A/c)
Bank Account ur. 39,690
To equity share application & allotment A/c 39,690
gBeing the application money roceived on 630
equity shares qT
Rs. 50 each at a premium of Rs. 13 per.9.bp1e,).

52
 1"t April' 1997
Balance sheet of exchange Ltd' As on

53

|
Working notes

1t; Calculation of Number of Equity Shares to be issued Rs. Rs.

hardn.6 v, nf nrnfit and
.- loss account 48.000
vu,u,,v: r.-..- - -
2,500
Less: loss on sale of investment
12,000 11,500__
Amount to be retained as balance
33,500
Amount available for transfer to Capital
Redemption res.erve
L Nominal value of Equity shares
to be issued (65,000 - 33'500)
| of equitv shares = 31.500
"'i"r"" = 630 shares'
31 ,500
I No
l)u
(2)Calculation of Balance at bank

Bank Account

Rs. Assets Rs.

Liabilities
To.Balance b/d 31,000 By preference shares
'16,000 Redemption PJc 69,875
To Investments
39,690 .By balance c/d 16.815
To share appfication & Allotment A'/c
86,690 86,690

lllirstration - 4
'.---,.,,^'
Wheie forfeiture and reissue of shares is to be done before redemption). I he lollowrng
' is the Balance Sheet of a Ltd Cohpany as. at 31"t Maich, 1998'

Rs. Assts Rs.

l-iabilities '
Fixed assets 27,00,000
18,00,000 lnvestment 2,00,000
(against reserve)
Current assets 1 1,00,000

1,78,000
Reveriue reserve. 13,50,000
Current liabilities 4,50,000
Provlsions 2,22,000

40,00,000 40,00,000
 100 preference shares on which the lasi call of rs.20 was not paid, were forfeited by the
Board of Directors on 30'h April, 1998.

The Drreclors redeemed the remaining prefbience shares at a premium of 10% on 30rh
September, 1998. For this purpose 10,000 equity shares of rs.10 each were issued a[ a
prenrium of 10% and were fully paid up within 30th July, 1998. Cunent assets before redemption
of preference shares included Rs.2,00,000 in Current Account with Bankers. The Company
closr:s its accounts on 31"tMarch, every year.

Pass necessary journal entries and prepare Balance Sheet after fedemption of
oreference shares.
Solution
Journal entries
Date Particulars uf. Cr.
1998 Rs. Rs.

April 30 9% redqemable prefgrence share capital A/c Dr. 10,000

To calls in arrears A/c 2,000
To forfeited sh ares Alc 8,000
(Being forfeiture of 100 preference shares of
Rs.'100 each for non payment of final call of Rs.20
as per Board's resolution No..,.. Dated.......)
July 30 Bank A/c Dr. 1,10,000
To equity shares capital Aic 1,00,000
To secu rities premium A/c 10.000
(Being issue of 10,000 equity shares of Rs. 10
each at a premium of 10o/o for redeeming
prefeience shares as per Board's resolution
No......... Dated .............)
Sept.30 9% Redeemable preference share capital A/c Dr. 1,70,000
Premium on redemption of pre{erence shares A/c Dr. 17,000
To preference sh areh olders A/c 1,87,000
(Being amount due to preference shareholders on
redemption of 1,700 preference shares of Rs.100
each at a premium of.10%)
Sept.30 Securities premium A/c Dr. 10,000
Revenue reserve A/c Dr. 7,000 17,000
To premium on Redemption of preference shares
A/c
(Being premium on redemptlon of preference
shares provided out of sedurities premium A/c and
revenue reserve A/c)
 .! "t

Sept.30 Revenue reserve A,/c Dr. 70,000

To capital redemption feserve AJc 70,000
(Being kansfer of requlsite amount from revenue
reserve A,/c to capital redemption reserve A,/c for
redemption of prq&rence shares )
Sept.30 Forfeited shares account Dr. 8,000
To capital reserve A,/c 8,000
(Being balance of forfeited shares A,/c transferred
to capital reserve A,/c)
Sept.30 Preference shareholders A,/c Dr. 1,87,000 1,87,000
To Bank fuc
(Being payment of
shareholders)
"amouni 9r" to preference

Balance sheet of...... as at September 30, 199g

Liabilities Rs. Assets Rs.
Equity share capital (fully paid) 19,00,000 Fixed Assets 27,00,000
Capital redemption reserve 70,000 Investment(against reserve) 2,00,000
Capital reserve 8,000 Curent assets (including
Revenue reserve cash at Bank Rs.1 ,23,000
(Rs.13,50,000 - Rs.77,000)
Current liabilities
12,73,000 i.e., Rs. (2,00,000 - 10,23,000
4,50,000 1 ,87,000 + '1,10,000)
Provisions 2,22,000
39,23,000 39,23,000
REVIEW EXERCISES

(i) Redemption of preference shares amount to reduction in the capitar of the company.
(ii) The nominal varue of the shares can be redeemed from the sare of fixed
assets.
(iii) Distributable profits means profits which would olherwise be available for
dividends.
(iv) Premium on redemption of preference shares can be paid out of capitar
reserves resurting
from profit on revaluation of fixed assets.
(v) Debenture premium can be utirized to pay premium on redemption
of preference shares.
(vi) Proceods means thei realized amount when shares
are.issued at a discount.
(vii) The logic behind the creation of the capital redemption
reserve is to maintain the caDital
siructureofthecompanyintactafterredemption'
(viii) capital redemption reserve account can be utilized to pay
dividend after obtaining the
. nscessary of thd company
law board.

56
 Ans.

Indicate the correct answers

(a) Capital Redemption Reserve Account is created :

i. Out of securities premium account

ii. Out.of share forfeited account.
iii. To meet legal requirements.

iv. Voluntarily.

{b) Preference shares can be redeemed :

i. lf they are fully paid up

ii. lf they are partly paid up

(c) Preference shares can be redeemed out of :

The proceeds of issue ofrdebentures

ii. Share forfeited account

ii;. The proceeds of a fresh issue of 5hares

(d) Capital Redemption Reserve Account can be utilized :

i. For writing past losses

ii. For declaring bonus to employees

iii. For writing of capital losses

iv. For issuing partly paid bonus shares

v. For issuing fully paid bo4us shares

Ans. [(a)(iii);(b)(i);(c) (iii); (d) (v)].

Short Answer Type *

r VJhat are redeemable preference shares ?

. oan partly paid up redeemable preference shares be redeemed ?

',. What are the two sources of redemption of preference shares?

Can preference shares be redeemgd out of fresh issue of debentures or amount realized

47
 from the sale of fixed assets?

5, Give the journal entries when

i. Partly paid shares are made fully paid up by nonus issue.

ii Fully paid bonus shares are issued to existing shareholders in a certain proponron.

Long Answer Type -

1. Discuss the provisions of raw with regard to redemption of redeemabre preference
shares as laid down in section 80 of the companies Act.

2. under what conditions may a company issue redeemabre preference shares

ano rn
what manner they may be redeemed ?

3. Explain in brief the procedure (arong with journar entries) for sorving probrems
on
redemption of preference shares.

4' whar do you mean by capitar redemption reserve account ? How is it created?
How
can it be utilized ?

5. Under which section of the companies Act, preferdnce shares can be

redeemed? can
partly paid-up preference shares be redeemed?

PRACTIC,AL PROBLEMS

1 . (Redemption out of Divisible profits). The following balances

are appearing in the Leclger
of the company as on 3 j .3.97 :

Rs.
Share capital - equity shares (fully paid up) 6;00,000
Preferences shares (fully paid. ' 3,00,000
General reserve 2,00,000
Profit and loss account (Cr. Balance) '1,25,000
Securities premium account 50,000
The company decided to redeem the preference shares a! a premium
of 10 per cent
out of its general reserve and undistributed profit.

Give journal entries relating to the redemption of the preferences

hares.
2. (Redemplion by fresh issue and out of profits). A company
wishes to redeern its
preference shares amounting to Rs.1,00,000 at a premium
of S% and for this purpose

58
 premiunr of 5%' The company has also
issues 5,000 equity shares of Rs'10 eaoh at a
aba|anceofRs.1,00,000inGenera|ReserveandRs.S0,000inprofitand|ossaccount.
Give the journal entries to record the above transactions
of operations
(Redemption out of profits and by fresh issue) A company' in a series
i
3.

(1) of Rs 10 each' redeemabie)

issues at par 40,000 redeemable preferences hares
at premium of 5 Per cent,
hares out of the profits of the
(2) Redeems 15,000 of the redeemable preferences
company.
at a premium of Re'1 pel
(3) lssues for cash 30,000 equity shares of Rs 10 each
of the redeemable preference
share and out of the proceeds, redeems the balance
snares.

Journalize these transactions

balance sheet of sterling
4. (Where ledger accounts are to be prepaled)' The summarized
Ltd. As on 31"tMarch, 1996 was as follows :
Rs. Rs-
Sundry assets 34,00,000
Share caPital
Cash' 6,00,000
lssue & paid-uP
10,000 8% redeemable 10,00,000
Preferences shares of
Rs.1000 each
1 ,00,000 Equity shares
10,00,000
Of Rs. 10 each 5,00,000
Capital feserves 2,00,000
General reserves 9,50,000
Profit & loss account 3,50,000
40,00,000 40,00,000
Creditors
1996 at a premium ol 25ok" Ior
The preferences nares were redeemable on 30th June'
equity shares of Rs'10 each at a premium
the purpose, the company oecided to issue 50,000
of Rs.4 per share payable in full on 15th June' 1996

Show the necessary Iedger accounts'

X and company issued
1 . (Where balance sheet is io be prepared after redemption)'
preference shares of Rs'100
50,000 equity shares of Rs'1Q each and 3'000 redeemable
31"rMarch' 1996 profit and ioss
each, all shares being fully called and paid up' On
and General reserve account stood
account showed an undisiri.buted profit of Rs 50'000
 at Rs.1,20,000. on 2"d April, 1996 the directors decided to issue 1,500% preference
shares of Rs.'100 each for cash and to redeem the existing preference shares at Rs.105
utilizing as much profits as would be required for the purpose.

Show the journal enlries to record these transactions. Prepare also a summarized
balance sheet showing the position of the company on completion of the redemption.
On 31"tMarch, 1996 the cash balance amounted to Rs,1,85,000 and sundry creditors
stood at Rs.87,000.

Ans. lBank Balance Rs. 20,000; Amount transferred from profit and loss account to
capital redemption reserve account rs.45,0001.

2. (Where bank loan is taken for payment to shareholders). The balance sheet of Grey
Ltd. As at 31"rMarch, 1997 was as follows :

Liabilities Rs. Assets Rs.

Share capital (shares of Fixed Assets 8,00,000
Rs.1 00 each, fully paid) : Investments 1,00,000
Equity 5,00,000 2,00,000
7% redeemable prefe'ren ce 3,00,000 Other current 5,00,000
Securities premium 50,000
Capiial reserve 1,00,000
Revenue reserve 2,00,000
6 per cent debentures 3,00,000
CrediLors 1,50,000
16,00,000 16,00,000
Both the redeemable preference shares and debentures were due for the redemption
on 1"rApril, 1997. Grey Ltd. Took the following in this respect : '

(1) lt issued 2,000 equity shares of Rs.1O0 each at a premium of 10 per cent, the shares
were fully subscribed and paid for.

(2) lt sold the investments for Rs.90,000

(3) lt a.ranged a bank loan io the extent necessary.
The redemption was duly carried out. Prepare the balance sheet of the company
immediately afterwords.

Ans. [B/C Total Rs.13,00,000; Bank Overdraft Rs.90,000]

1 . (Where no, of shares to be issued is not given) Spotlight Limited has issued share
capital of 60,000,8% redeemable cumulative preference shares of Rs.20 each and

60
 25,00,000
Plant and machinery
lssued share capital ; 9,00,000
Furniture & fixtures
60,000 8% redeemable Stock 15,00,000
Cumulative Preference Debtors Investments 14,00,000
Shares of Rs.20 each, fully Paid bank 3,50,000
10 eacn 12,00,000 Balance at
4,00,000 equity shares of Rs' 3,50,000
40,00,000
fully Paid
7,00,000
Profit and loss Ar/c
11,00,000
Sundry creditors

decided
of preference shares it was
:

rn order to fac itate the redemption

(a) to sell the investments for 15'3'00'000 balance on

funds subiect to leaving a
(h\ to finance part of the redemption from company
profii and loss accoun'
t of Rs 2'00'000'
raise
Rs'10 each at rremium of
a premrurrr ^r'a },v' share to
ur Rs 2 per
of
(c) io issue sufficient equity shares
the balance of funds requlrec'
were fully
were redeerned on due date and equity shares
The preference shares
subscribed.

You are required to Prepare :

the above transactions

(i) Journal entries to record
as on completion of redemption
0) A memorandum balance sheet
Bank baiance
Rs'65'9g'000' No of shares to be issued is 75'000:
Ans. [B/S Total
rs.2,90.0001.
up)' The balance sheet of
happy private limited
is drawn
1. (Where scheme of redemption
follows:
as at March 31 , 1995 was as

ol
 of
decided to redeem Dreference shares both by issue
the pre
The Board of Directors
and oy
capitar ano
fresh capttat
n"t*'ln:tl:"1lY TIlllTj; lilt.ffiff:fi:
utirization ot j:;:*:t;^
bv urrrrzou.,tl^:'
'u'"*"" "nrr draw th" bulan"* sheet after redempticn
ro tn
.rr^w up
* ,oo'"! them the scheme for redemption and
along with journal entries'
Ans. [B/S Total Rs. 97,00,000]
(where finar carr is to be made and barance:i""::l::"::"iXTi,:Y;"':"#o]"" "
Sundry assets 2,80,000
Share caPital 30,000
lnvestments
20,000 Equity shares of 70,000
2,00,000 Cash at Bank
Rs.10 each
10,000 12% redeemable
80,000
Preference shares of
42,000
Rs.10 each Rs.8 Paid uP
58,000
Sundry credilors
Profit and losg accounr

Investments have been sold for Rs'25'000'

as provided in the Articles of Association'
balance sheet after redemption'
Make journal entrtes and a summarized
Ans. [B/S Total Rs' 3'42'000j
Hints:
as fully pald up
to make partly paid preference shares
(1) Final call of Rs.2 per snare called per sectio'r B0 of the
shares can be redeemed as
because only fully puiol'uiu'"nt"
comoanies Act, '1956'

oz
 uNlT - |

issue of shares and redemption of preference

Studenti till now we have discussed the
shares'ButthereisanotherViialsecuritylikedebentureswhichisissuedtoraisefundsintne
io* oi u debt which is widely used in practice
1. I4eaning of debenture
2. Types of debenture

3. lssue of debentures
4. Interest on debenture
5. RedemPtion of debenture
6. Review exercise.

ME,qNING OF DEBENTRUE - A debenture

is a written acknowledgement of debt by a
to debenture holder:s at a fixed rate at
company under its common seal' lnterest is oaid
regular intervals.

TYPESoFDEBENTURES_Debenturesmaybec|assifiedfromdifferentpointofview:
classified as
(1) From security point oi view : debentures may be
(a) Naked or simPle debentures

(b) Mortgage debentures

do not carry any security in respect of

Naked or simple debentures : The debentures which
called as naked or simple debentures'
payment of interest or repayment of principal amount is
secured by a charge on the assets or
Mortgage debentures : The debentureg which are
The debenture holders have
properties of the company are called as mortgage debentures'
as unpaid interest out of the assets mortgaged
the right to recover tneir principai amount as well
by the company'

oc
 debentur€s may be
permanence point of view I from this point of view the
(2) From
classified as :
(a) Redeemable debentures

(b) lrredeemable debentures

Redeemabledebentures:Thesedebenturesprovldeforthepaymentofprincipalamount after'they
p"'loi' n"a""n'table debentures can be reissued even
on the expiry of a certaln
cancelled'
n"* o""l.tlro-emed until they have been
Irredeemabledebentures:thesedebenturesareretainbdasapartofthepermanentcapital They are not
fhey are arso known as perpetual debentures'
structure of ihe company. due for payment only
during ihe ti't" *mp'"v' S""ft debt becomes
refundable is nol made regulany'
f

go*t't"tit"'"i
tiq'ioation or wnen tl: o^1'T:"t ot'nterest
when the company
'nto Jicanceting its liabillty to the debenture holders at any
time by
The company nas tne option
giving due notice to them'
may be classified as
(3) From priority point of view : The debentures

(a) First debentufes

(b) Second debentures

payment is made t0
: The debentures which are paid first before any
First debentures debentures'
known as first type
another type of debentures are
{irst
paid after making the payment of
Second debentures : The debentures which are
debentures
debenlures is known as second
Debentures fiaybe classified as
(4) From iecording point of view :
(a) Bearer debeniures

(b) Registered debentures

Bearer debentures - and

to another bearer without endorsement
The debentures, which are transferable called as bearer
or government currency notes are
they are iusi, like rlearer cneques
debentures

Registered debentures -
and
io another bearer with endorsement
The debentures, which are iransferable debentures'
are known as registered
fottowing some legal formalities'

64
 SHARE
DEBENTURES AND
DISTINCTTON BETWEEN

and debenture stgck:

iffintures

STATES FOR DEBENTURE:

Thefol|owingarethemainstagesofissuingdebentures;
(i) lssue of debentures
- ' )mption of debentures
(ii) Creation o{ issue lor reoe

(iii) RedemPtion of debentures'

ISSUE OF DEBENTURES :

Debentures may be issued fronr different point of view :

1 . Debentures issued for congideration

2. Debentures issued for Price

3. Debentures issued from redertption point of view :

From consideration angle the debentures can be issued

(a) For caslr

(b) ln consideration other ihan cash

(c) lssued as collateral securitY

Debenture issued fro cash

The debentures may be issued at par, at a premium, or at a discount. The following

entries are passed in connection with the issue of debentufes :
1. On receipt of application moneY
Bank A/c Dr.
To debenture application A/c
(Beinq appllcation money received on ..debentures @ Rs. per debenlqree
2. On altoiment the application money on debentures allotied is transferred to
debentures account :
Debenture application Alc Dr.
To debentures AJc
(For the transfer of application money on debentures allotted to debenlures
'
account)
3. Refund application money on rejected applications
Debenture application AJc Dr. t
To Bank A,/c
(For refund of the application money on reiectedapp!&g!9!) -.-
4. Transfer of excess application money to debenture allotment account :
Debenture application AJc Dr.
To debenture allotment A,/c
(For transfer of excess application money to debenture el!q1q94AJ9L
5. Amount due on allotment money
Debenture allotment A,/c Dr.
To debentures AJc
(For allotment monev due on .. .. Debentures Rs, perdebenture)
6. Receipt of allotment money :
Bank A/c Dr.
To debenture allotment PJc
(For debenture allotment money received)

oo
 e
F ntLur-eT"EAl mo n eY
dl6be du

Debenture 1"{ call Nc

oi oeilenturc,f c?! rni!9J

i!9
ffi"5;ttrt"t";;li *"*Y received :

Bank AJc
ucve' rrvr - 1"' call moneY
., debenture
To
For debentqi e-Ijallg!J)-._-_.--
I received
monev due and
the debenture second ca,
h*ff_,ffifor
call money actually received'
c"o""iut" 2'd
PRICE :
OF DEBENTURES FROM POINT OF VIEW OF
ISSUE
are three different situations
:
From this point of view there
(a) Debentures issued at Par
at discount
{b) Debentures issued
(c) Debentures issued at Premium

Debentures issued at Pair equat to

to be issued at par when the amount collected foi it is
Debentures are said the debentures of Rs'100
(face ;ebentures' for example
ihe norninal value "'l;;;;f-th"
each issued at R 100'
lllustration -I
of Rs'100 each payable :
X LtC. issued 20'000 12% Debentures
on alloiment; a1d ance two months after allotment'
Rs.20 on applicationlRs'40 l!lUaf were accepted
for 28'000 Jeuentures' npplications ol lB'000 debentures
The public applied 2'000 debentures and the remaining
in full; applicant' to' +'ooolJiJntu'"' *"i" "ttott"o transaclions'
iti t""*V *"t Otfy received' Journalize the
. applicaiions *",u
'u1""tuo'

Bank A/c
To debenture aP Plication A/c
t of aPPlication on 28,000 debentures 5,60,000
bebdiures APPlication A/c 4,00,000
To 12% Debentures Alc . , 1,20,000
fo Cenenture Allotment A/c 40,000
To Bank A/c

lrnHTiil::g:'fr li:J.l*:l"i:33#i,1x"J'?['$::
t:
ture,s tr t
)i l,i,,i v'l z, 0 oo deben a
"j"^t::: on ",Lu, ::ii:
rejected
IlJl:.'";i" ;.";;";:;;;ji;ion
.
monev "o
tions refunded.

67
il*t ot DEBENTRuE'AT DlscouNr
debentures are issued
when debentur"'
bv
:"*p"ll11: :1Y:::JA:h::fr
"* i:::::fi.?"Jj:i:ffi;;'u?n"nt,'u lfl
or Rs 1,000 J*:'g:i:
is orrered to
to the
value)itissaidlot':::t::::at on each debenture is loss
a drscount. Here Rs'50 and
public at Rs.e50, it is issue "1." i'ijiili:.X;";;;;;; ilis toss. tt is a capital loss
o{ equiiv' ii is desirable.to-11:u^:r,0" the
H:ffi;.';;p'intipr" of balance sheet, under
until it is written off compretelv'
it is shown :i T::Iffi;;;;l;.r"
:n"
as a ficlitious asset
of debentures
t"roi;g '*i"""laneous Fxpenditures" mentioned'
account is supposed
* * uffotm"nt' unless' otherwise'
" ""U**
Thereisno|egalrestriciiononissuingdebenturesatadiscount.Therequisiteentryto
be passed is

2 (lssue of dEbentures
at discount) ''
lllustratlon -
of 10% on April 1'1991
l
each at a discount
debentures of Rs'50
XYZ Ltd; issued 2,000 14%
payable as follows : an
(discountto be adjusted with allotment)
on allotment
Rs 30 on application; Rs'10 all money was- received
in fu
*""
rti]st'" *"V
"'bsciuef ;no
Rs.5 on first and tinat catt' only)'
Oalance sheet (extraci
journal entries; ledger
Give "tt"*u
""0
Solution

68
 E6nk account
;;' ;;;;;;'" aPPrication acc311l

ftGit# aPPI;tt"naccounr
account
To i 4% debentures t""
Li5,?l"ll ;t".,;;t,il ;-= "''" "''
itebe;ture account
"ll'lt'nent nt
;i"d";i ;;l;.' e of debentures^accou
"JJl"trt". allotment.account
i.
l;;;;i;;;t 4s!sr-!!!e-a!9-qr!eeg!!
6Enk account
iI J"uuntutu allotment account
allotme nt alloqn!19lglygg
#b$t"t€lfia|call account
To 14% detrentures accounr
o -"''
'l"ifJ?,i"1"#i;ffi4;;"
Bank account
"
iJ Jeuenture final call.accounl ,^ o-(
- @ nar debenture
Rs'5 per deben
I;"'',:;T:1";ffi'ffi:i:;-';;'

14% DEBENTURES ACCOUNT

DTSCOUNT ON ISSUE OF
I
IEBENTURES ACCOUNT
BANKACCOUNT

Dr-
Rs. Rs.

60,000 By balance q/d 90,000

i^ .l"r,"nture application account
iJohontttre allotment account 20.000
10,000
iJ debenlure final call account
90,000 90,000

BALANCE SHEET (Extract onlY)

Asseis
Liabilities
Bank 90,000
1,00,000
Secured loans :

Discount on issue of 10,000

T,ooo,l+"t" deberitures @ Rs 50 1,00,000
ldebentures 1,00,000
each

lllustration -3
of 1'000 debentures of
"rbscribed' o;
issue' which was fullv subscnneo'
Alimited company *"de !::::':'::':;
"n
RS'10oeachatRs.97'Thedebentureswereatlottedon3l"tJu|y200l,subscriptionsbelng
payable 10 per cent on upp it-"tionJO
ptr cent on ajlotment' 25 per cent on 30rh September
,ni thu brlunt. on 30th November 2001
Under.thetermsoftheissue,paymentcou|dbernadeinfu|Iyon31'lJuly,2001' such
at the rate of 10 per cent per annum;
interest on any amounts pr"fuiO fuing'uttwable
payment' but was payable
interest was not deductible fiom the sibscriber's ?y'tn:-1T*t]
prepaymenr
2001 The altotted of 300 debentures took advantages of the
on 30,h November .
company't
Journatize tle entries to be made in the
terms, white oth"r. p"io on tiJi"r" Jut"J.
books; (lgnore Debenture Interest)
lc.B.S.E. 1e92 (Delhi) (C)l
Solution Journal
L.F. Dr.(Rs. Cr.(Rs
Date Particulars
) .)

Dr. 10,000
2001 Bank AJc
f ro 1
To debenture Application money received '000
(Being the application money received for '000
1

d"nuitur"* at the rate of Rs- 10 per debenture)

70
Sept
30

Woiking Note ;

Calculation of Interest on Calls"in'Advance

Rs.7.5oo x = Rs'r25
iZ, i$
Rs 6,600 x i- x -19 = Rs.22o

71
ISSUE OF DEBENTURES AT PREMIUM
|fdebentu|esareissuedatapricemorethanitsnomina|Value(facealue)SuchaS
issueiscalledissueatapremium'Folexample,ifadebentureofRs.l000isofferedat
of issue price over face
premium' The excess
1,050, it is a case of issue of debeniirres at
Valueispremium'Thepremiumisacapitalgainforcompanysoitistobecrediiedto,premium
onissueofdebenturesaccount''Likediscountonissueofdebentures'premiumonissueof
debenturesiSa|sorea|izedattheiimeofai|otment,ifnoth|ngtothecontraryisprovided.

',"'','onissueisacapita|gain,soitisshownontheliabi|itiessideofba|ancesheet
under the head 'Reserves and Surplus"
The entries relating to premium will be :

(i) WnJ i.tttutt"nt containing premium is made due :

Dr.
Debenture allotment a/c
(Total due)
To Debentures a/c
(Amounl of
To Premium on issue of debentures
debenture ontY;
- eacn
(Being allotment money due on - debentures @ Ks
(Amount of
including Premium)
Premium)

a/c
(ii) When debenture allotment money is received tsanK
Dr.
To Debenture allotment a/c
With total amount
(Being allotment money received on " ' debentures)
received on
allotment

the conditions regartling the utilization of

Nowhere in the companies Act have been provided
on debentures should not be
amount of premium on debentures' Still the amount of Premium
transferredtoprofitandlossaccountbecauseitisnotaprofitarisingfromthenormaIoperalions
of the company.
Theamountofdebenturepremiummaybeusedforwriiingoffdebenturetssue
it may be credited to Debenture
expenses, discount on issue of shares etc' or alternatively
redemotion fund (if anY).
lssue of debentures at Premium
lllustration 4
each ai Rs 110 payable as follows:
A company issued, 1,000 6% debentures of Rs'100

Rs.30 on application (including premium Rs'5)

Rs.30 on allotment including premium Rs'5)

72
 call'
Rs 50 on first and final
due was received' except
were applied for and allotted' Alt money
All the debentures
final call on 20 debentures'
the above'
Pass |ournal entries for
JOURNAL
$OLUTION:

lump sum)
iii"-*fi"" - 5 (lssue of debentures {or a
Journalise the followings :
 at par'
(a) lssued 5,000 7% debentures of Rs 100 each'
100 each at'10% premium'
(b) lssued 5,000 7% debentures of Rs'
100 each at 10% discount'
(c) lssued 5'000 7% debentures of Rs'
par'
All the debentures are redeemable at
SOLUTION: JOURNAL
C redit
Dr. iRs. Rs.
lssue at Par
5,00.000 5,00,000
Bank a/c
a/c
To debenture application & allotment
debentures
(Being application money received on 5'000
@ Rs. 100 each)
5,00,000
ouGntrE & allotment a/c
"pptication
To 7% debentures a/c

5,50,000
lssue at Premium
Bank a/c
To debeniure application and allotment a/c
(Being application money received)-
5.00.000
D"b*trr* ,pplication and ailotment a/c
50,000
To 77o debentures a/c
and
(Being application money transferred to debentures
debenture Premium a/c)
4,50,000
lssue at a discount
Bank a/c
To debenture application & allotment a/c
(Being application money received)
4,50,000 5,00,000
O"U""tui" application and allotment a/c
50,000
Discount on debentures alc
To 77o debentures alc
a/c)
(Being application money transferred to debenture

74
 OTHERTHAN CASH
ISSUED tN CONSIDERATION
DEBENTURES (assets and liabilities) and issues
purchases a running' business
Sometimes a company
i'
tt tult"o ;
debentures in consideration'
to vendor, debentures " "J;;;;;;;' 't:::
recorded'
other than cash ln u"n
tuu"itn foilowing entries are
is signeo'
l. When agreerneni
of purchase of business
a/c Dr' with-amount of
Business purchase
Sundry assets a/c
Dr. Purchase

To Vendor's a/c

(Being sundry assets Purchased)

paid to vendor's in the iorm
of debentures'
consideration is
ll. When purchase
Dr' with amount of.
Vendor's a/c .

alc purchase consideration

To debentures
as consideration for assets purchased)
(Being debentures issued
be
i" oiher than cash thev can
ar€ issued
Note : When debentu'es :::tl9::1t1"" premium th: amo:rnt of
discount' tt tney are ilsued at
issued either at par, at
p'u*iuiio''nt and if issued at a
t p'"*'t* issue of debentures account'
premium will be credited "" on issue of debentures
account"
discount, the discount wil' o"[;;i"d t"-:;i"count

purchase consideration (amount to be paid for TS::s eu':"11s::I:lould

As per rute
o" J"," t::iU:kf:;,::ilmn':f
n : r'"::tfi;3Tl,il,iii"1'll ::ffi'::;
ii is"q,uiiJn",
f
more than the value or goodwill'
as v--
assets ls
net assers rrvdrev qe
is lreated
maoe over and above the value of
Extra PaYment
follow :
which can be calculafed as
Net assets
Goodwill = purchase consideration -
purchased - Liablities assumed
Where Net assets = Assets than the value of
to be paid bY^ company is less
ln case the purchase consideration
netassets,theexcessotnui.uu"t.overpurchaseconsideratlonisacapitalgain,Whichis
account
transferred to capital reserve
lllustration - 6
other than cash)
(Debenture issued in consideration in cash and the
Rs.2,20,000. Hal{ of the payment was made
z Ltd purchased building for ai a premium o{ 10%' Pass
the necessary
remaining half by the '"*;'";';;;;;bentures
(C'B'S'E' 1995)
iournal entires'

75
SOLUTION JOURNAL - Z LTD,
Dr. Dr. Rs. Cr. Rs.
Building account
To vendor 2,20,004 2,20,000

(Being purchase of building)

Vendor Dr. 2,20,4O4 1 ,1 0,000
1,00,000
To bank account
10,000
fo 120/o debentures account
To debenture premium account
(Being payment made and debentures issued in satisfaction
of consideration)

Working note :

Calculation of debentures to be issued :

r15.

One half of amount payable in debentures 1 ,1 0,000

Debenture price being Rs. 100 + 10% premium 1't0

No. of debentures = 1,10,000 + 110 = 1,000

'1,00,000
. . Nominal value of debentures and debentures premium (being 10%)
10,000

lllustration - 7 (Calculation of goodwill)

starAutomobiles Ltd. took over assets of Rs. 2,35,000 and liabilities of RS.40,000 0f
Ashoka Automobiles Ltd. for the purchase conside.ration of Rs. 2,20,000. Purchase
consideration was payable by issuing debentures of Rs. 100 at 10% premium. Give journal
entries in the books of Star Automobiles Ltd.
SOLUTION JOURNAL
Particulars L.F. Debit C red it
Sundry assets a/c Dr. Rs. RS,

G oodwill alc l.Jt. 2.3 5,0 0 0 40.00 0

To S und ry liabilities a/c 25,000 2,20,000

To Ashoka autom obiles ltd.
(Being purchase of assets and ,lia-bilities of Ashoka
au tom obiles le td ).

76
 Dr 2,20,000 z,oo,octo
Tiffi"luto*obiles Ltd' 2 0.00 0
I
l

To debentures a/c
issue of debenture a/c
i To premium on se
as consideration for purcha
1(geing oeuentLjres issued
I lt uuJin"t" at 1o% Premium)

Working notes ---

assets being valued (2'35'900
is Rs'2'20'000 ag-ainst net
The purchase consideration goodwill'
rhe Jifference or Rs' 25'000 is
- 40,;;;il';,nu,doo
Whendebenturesareissuedasacol|atera|securitytherearetwowaysoftreatment
in the accounting books' ,! such
- of debentL' *-'
^..^!a .{ah6nr,,raq
time of issue
(i) in the account books at the
No journal entry is made sheet to the fact that
below th;l;;;
;nthe liabilities side of the balance
A note is appended sheet
This will be shown in the balance
ov ti'" *t';J debentures'
they have been secured "i
as follows :
BALANCE SHEET (EXTRACTS)

slO-e.-Wn"n
P"* :'.t::'-:: :5:":'1"":?:XlT'J' "
,t.t" ioun is re-paid the
entry is reversed in order
and debentures on tfre fiaUifitiei
to cancel it.
coltateral security)
lllustration 10 (debentures issued as
- 1993 During
6% debentures outstanding on 1"tJanuary'
Acompany had Rs'5'00'000 placed with
,oor t'o* bank for wiich the company if any' Also
the vear company journal entries'
for "'o#o:t"it"j'oi'ooo
Rs'1'20]oOo t""X"t"'
bank, debentures
Debentures
"' -t-YlY'.tutt
gu* Loan will appear
# in company's Balance Sheet'
show how the

77
Solution : First Method :
entry
for issue of debentures as collateral security' Only the
No entry will be passed
i'e'
for bank loan will be Passed
Dr' 1'00'000
Bank a/c
1
'00'000
To Bank loan a/c(Being
loan obtained from bank)
only)
BALANCE SHEET (Extract

5,00,000

BALANCE SHEET
RS. Assels Rs

Debentutes 1,20,00c
6,20,000
suspense a/c

1,00,000

.78
. .:
1991 (CI
tC.B'S.c. (Foreign)

are passed)
enrries for debentures
ll.$econd Method (when

OF BALANCE SHEET OF A LTD' AS

AT "'
AN EXRACT

Liabilities
lllustration - 12
part and raised a loan of
issued 5,000' 13% debentures of Rs"100 each at
A Ltd' 13% debentures' How will you
Je"ri.u oy nr.r,oo,o00
Rs.80,000 from bank,.orrut.iurrv assumingthat the company ahs
Balance sheet of the company
show the debentures in the in the books. tc'B'S'E' (Foreignl
ot o.ounti,il, u..ottut"rut security
recorded the issue
1ee2 (c)l
Solution
SHEET
AN EXTRACT OF BALANCE

5,80,000

1,00,000

oF vElw
,iorr,r,roloN FRoM'coNDlrloNs oF REDEMPTIoN" PoINT
Likeissueofdebenturesatpart,premiumordiscodhttheredemptionofdebenturescana|sc
be:
(a) RedemPtion at Par
(b) RedemPtion at Premrum
(c) RedemPtion at discount
formed
Thus following sets of cases can be
I

(i) lssue ai Par, redeemable at Par

par
(ii) lssue at discount, redeemable at
par
(iii) lssue at premium, redeemable at
premlum
(lv) lssue at par, redeemable at
premium
(v) lssue at discount, redeemable at
(vi) lssue at premium, redeemable at
premlum i,

Thestudyofabovesetsc|arifiesthatdebenturesareredeemablewitheratpartor
in future is provided in the prospectr
premium. How the debenturls u|." to U" redeemed

80
 redeem its
of issue' Sometimes a company can also
issued by the company at tne time it is normally seen that
by purchase trom-open marf<et Generally.in such cases
debentures proflt on redemption'
il;;;;;G;hem at below the par value' thus makins
Jourhal entries for issued at
part and*9:"*"bl:j!"t
(i) ffidredeernableatpar
Dr.
(a) Bank a/c
T^ nahonlu.e aoolication and allotment alc
Dt.
(b) ffi;tr* .Ppli"tion and allotment a/c
To debentures a/c
arr\r rt'ussrrrg
(ii) When lebentures are issued at dlscount

Dr,
ta) B lnk a/c
Dr,
T . nohFnirrre doDlication and allotment a/c
a/c Dr.
(b) beU"ntrt" uppfication and allotment
Discount on issue of debentures a/c
To Debentures a/c
rcv
Whe r debentures are issued al
premlutrr
(iii) "rru
at pa (
Dr.
(a) Bank a/c
T^ nohanlrrre aoolication and allotment a/c
Dr.
(b) D"b""G"pplb"t." and allotment a/c

To Debentures account
To premium on issue of deglu.re: a/1___
(iv) :n ic<rrcd at oar and fedeemable at premlurlr
D.r. With nominal
(a) Bank a/c value
-r^ n6h6ntrr16 annlication and allotment a/c
a/c Dr. (l!ominal vqlue) |
(b) Debenture application and allotment .l
Difference 'i
Loss on issue of debentures a/c
I
issue ano I

To Deb€ntures a/c redemplion I

a/c Prlce )
To premium on redemption of debentures I

(Nominal value)
(amount of
premium )

81
 With actual
amount received

(Actual receipt)
(Difference ln
issue and
redemPtion
price)
(Face value)
With prarniuin )

is a personal account because it represent

The pointto note is that premium on redemption
theextraliabi|itywhichistobedischargedwhendebenturesareredeemed.|tisrecordedo to pay mor
it is paid off. Since.company promises
the liability side of the natance sheet uitil debited to "tos
at the time of redpmption, th;t;f"*'
there is ioss oJ equal amount which is
onissueoidebenturesa/c"'lhislossonissueofdebenturesiswrittenoffgraduallyever on the assets side I
off portion appears
year during the life of ihe debentures' The unwritten
'Miscellaneous Expenditure" as a fictitious asset'
he balance.sheet under the head
he|p of fol|owing illustrations :
. The mechanism can be exp|ained with the
lllustration - 13

Journalise the following transactions :

Rs' 100'
(i) A debentures issued at Rs' 95 repayable at
at RSi 19:-
iiil Adebenture issued at Rs' 95 repayable
'100 repayable at Rs' 105'
iiiit A debenture issued at Rs'
at Rst 100'
iiol A debenture issued at Rs' 105 repayable
100' IC'B'S'F' (Delhi set lll
Note : The face value of each debenture is Rs'
Solutir Journal
L.F Debit. Credit
Dat Particulars amour
Amou
nt Rs. t Rs.

Dr. 10{
(i) Bank account
Dr. 5
Discount on issue of debentures a/c
To debentures account
(Being the issue of a debenture of Rs'100 at a

discount of 5%)

82
 95 100
6-1 Bank account Dr.
Dr. 10 c
Loss on issue of debentures account
To debentures account
To premium on redemption of debenturos account
(Being the issue of debentures of Rs' 100 at a

.dirbornt of 5olo repayable at a premium of 5%)

(iii) Bank account
Loss on issue of debentures account
To debentuies acbount
To premium on rod€mption of debenturgs a@ount

Dr, 10q 100

(!ul Bank account
To debentures account
(Being the issue of a debenture of Rs'100 at a
premium of 5olo repayable at Pao

.Solution Journal of P Ltd.

,: Ci. Rs
| .a. . ..:.:i
Dr i6;30,000
Bank account ,

To debentures application:and Allotment Nc

(Being the.issue of 7'000 debentures oJ'Rs'10O:eachiat a
I discorrnt rif 10olo)

Dr' 6,30,000 7,qo,0oo

Dr. 1,05,000 35,000

83
 Dr. 7,00,000 7;35,000
Debentures account
Dr; 35,000
To oremium
-! on redemption of debentures account

To debenture-holders account
{Beino amount due on redemption to debenture-holdeis)'
Dr. 7,35,000 7,35,000
Debenture-holders account
To. Bank account
''--Dtion paid to
ru uriu'r rru' s--
debenture-holders)
(Being amount due on reoemptlorl paru

Rs.
Working Note :

70,000
Loss on issue o{ debentures
35,000
Discount on issue
1,05,000
Add: - premium or reoempuon
lllustration - 15
'n of 57o redeemable
io*p"ny'issued Rs'' 1,00,000, 1590 Debentures at a discount
aftei J0 yijars at premium of 10%' Pass iournal entry'

[C.B.S.E. 1e91 (Delhi)l

Solution " journal
L.F. Dr.Rs; Cr, Rs.

Dr. 95,000 1,00,000

Bank A/c
L:osd on'issue of debentureb A/r P"l 15,000 10,000

To 15% debentures
.t I

To premium payeble on redemption of debentures Nc '

(Being the issue of debentures at discount of 5% and
redeemable at d Premium of 10q/o)

lllustration - 16

Journalize the following transactions

(a)XLtd.issuesRs.2,00,000;12%DebenturesatdiscountofS%redeemableatpa
(b)YLtd.issuesRs.5,00,000Debenturesatadiscountof5%redeemableatapremir
of 7% [C.B.S.E. 1993 (Delhi) lll]

84
 Journal of X Ltd.

lllustration ; t7
journal ent ries how to record the following
You are required to show by means of
issues :

rs'100 each at a discount of 5% to

be
(i) A company lssued 14,000 debentures of
repaid at Paf at the end of 5 Years'
repayable
of Rs'100 each at a discount of 5%
(ii) A company igsued 5'000 debentures (c)
at a premium rri"iti"-*o J s y""r". [c.B.s,E. (outside Delhi) 1996]
"t
Solution Journal
L.F. Dr.Rs. Gr.Rs.
Partrculars . I Dr. 13,30,000 14,00,000
Bank Fi/c
Discount on issue of debentures Ar/c
I
Dr. 70,000
I

To debentures AJc I

{lssue of debentures at 5% discount) 4,75,000 too,ooo

Dr.
(ii) Bank A'/c 75,000 50,000
Dr.
Loss on issue of debentures AJc
To debentures Fi/c
i; ;;ffi;" redemPlion of debentures No ,'.
i':"|uJ';il;;;iuies'at 5Yo discount and 10o/o
pr"

85
l|lustration:'18(lssueofdebenlureJ-differenttermsofissue)
cases :
Record journal entries in following
at par' redeeniable at par'
(a) lssued Rs. 1,00,000 12% Debentures
at discount of 10%' redeem*:
(ul rrru"o R;. 1 ,00'000 12% Debentures " :':
at a premium of 5%' redeemable at par'
12% Debentures
G) tsru"O Rs. 1'00,000
at 100/o premium'
:(d) lssued Rs. 1,00,000 127oDebentures at par' redeemable
at 5% premium
at a discount of 5%' redeemable
(e) lssued Rs. 1,00,000 12% Debeniures
loss on issue of debentures in
books of accounts'
Also state how you will treat the

Solution

1,O0,000

90,000

1,q0,000

86
 1,05,000 1,05,000
lssued at premium, redemption at par Dr.
Bank a/c
To debentures application & allotment a/c
(Being application money received 0n
debentures)
Dr. 1,05,000 1,00,000
D"b""tr.r," ,ppfi.rtiqn & allotment a/c
5,000
fo debentures a/c
12o/o
To premium on issue of debentures a/c
(Being application money transfened to
debentures and prqrnl!-l! 3999]:4|-..--
Dr. 1,00,000 1,00,000
d lssued at par, redemption at Premium.
Bank a/c
To debentures application & allotment a/c
(Being application money received on
debentures)
Dr. 1,00,000 1,00,000
Debenture application & allotment aic
Dr. 10,000 10.000
Loss on issue of debentures a/c
To 12% debentures a/c
To premium on redemPtion a/c
/Roinn anrilinelion monev transferred)
Dr' 95,000 95.000
lsiued at discount, redemption at premium
Bank a/c
To debentures application & allotment aic
{Beino aoolication monev receiVed)
Dr. 95,000 1,00,000
Debenture application & allotment a/c
Loss on issue of debentures a/c Dr. 10,000 5,000
fo 12o/o debentures a/c
To premium on redemPtion a/c
(Being application money transferred to
debentures accouht)

premium payable on
Note : Loss on issue of debenture consists of discount on issue and
- sheet' lt will
redemption. lt is a capital loss and will be shown on the asset side on Balance
in Balance sheet'
be written off over a number of years. The balance will continue to appear

Interest on Debentures
paying the
lnterest on debentures is charged to the profit and loss account' While
the income
interest on debenturds, it is the obligation of the coinpany concerned to deduct
jor.irnal entries are
tax before making payment of interest to debenture-holder. The fbllowing
passed in this connection :

87
 Th
le of Profit and loss account'
,:f
fiiili]ff ll;ffi ;$hi*lt'"";lmt
ts o'
;ffi;;; ii is paid io the sovernment this account
"-il:E:",'J;1"'."i;:'H::::ffi
credited.
in the tribal balance
Debenture interest given
not'
interest while p-:!::ltg final accounts must be
The trealment of debentures
.u,"turrv'l.pu.i",,r-n"t'#Jl'? j;[Elil.x':i-tfl :i;",':r:ntf ff fi ;'l$'"':
c
balance shows "half Year's r
'oo\I and
I n^ .r^.'.'n Ii.u..5'8000** t
be debited with the gross amount Rs' 1u'uuu \"-'"*-"- 58 / -
loss account will

./| , .. +/
'1'1 \
ro nnn I in the balance slneet as liability under
the head
-
4,200 [r'c''--: ^ '"'""".,
.^,ill
rv be shown

inaome tax Payable account'

RedemPtion of Oebentures
liability on account of debent!
debentures refers to the discharge of
*n6n u companv wants to redeem
Redemption of
rhe rollowins tn,"" p'oorfili"i;ft;;;;ti;;ti*
debentures
a
Generallv debentures are redeemed
(a) Time of redemption of debentures' or ihe amount promised fro'
maxing lh" ?"vT"lj
expirv of tnu'r: ou'ioi-C'
sometimes"o'oun"u"*"u','"'"*!.n"iightintn.articlesofassociationtorec
o"t either bv installments
(

the debentures "0"*otion installment is nc

""J'"0#;;;;-iuL
purchasins them;;"b;;;;;;-ei'
eavment otiebentures bv
not
u lot' Sometimes a company'does
bul redemptioh ot ;e|"eiil ; Jt*ing
and wants to redeem the
deber
to. serye a notice *'iitn" O"U*t"re-holders
before the o"t"
L'o*tibleav purchasi* ::J "]'l'f:::t:
pel
"tiJ'o"tpt["ii'l can be redeemed either atthe expiry ol
the open marx"t' fnus debentures

88
 debentures or before the expiry of thd period by drawing a lot or by purphasing in the
debentures. j:
open market before the expiry ofthe period of
(b) Amount to be paid on redemption. The amount to be paid on redemption of
debentures depends on the circumstances of each case. lf the debentured are
redeemed on the expiry of the period or only during a lot, then the amount to.be paid
can be either at premium or at par as promised by the company. lf the debentures are
redeemed by purchasing them in the open market, then the amount to be paid depends
on the.market quotation, i.e., either at par or at a discount br at a premium' Generally,
the companies purchase their own debentures from the market when the debentures
are quoted below face value to take the advantages of depressed prices.. .

{c) Sources of Finance. The major sources wherefrom the debentures can be redeemed
may be (i) out of profits, (ii) out of capital, giii) out of provisions made for redemption
and (iv) by converting them into shares or new debentures.
(i) Redemption a;ut of profits
When debentures are redeemed out of profits, the following. journal enlries will be
passed.
(a) Entry for amount paid on redemption
Debit dgbentures account
Credit Bank
(b) Entry for transfer of profit
Debit profit & loss appiopriation account
Credit debeniure redemption reserve A,/c
(c) . When balance of D.R.R. A,/c is not required for redemption and is transferred to General
ReserveAccount .

Debit debenture redemption reserve account.

Credit general reserve.
The balanCe of general reserye is a free reserve and will be available for all purposes.
The effect of redemption of debentures out of profits is that the company withholds a
part of the divisible profits from distribution as dividend which may be retained in the business
itself as a source of internal financing.
lllustration - 7
On 1't January 1997, a company issued Rs.20,00,000 14% debentures at 5olo discount
repayable in five years at par. The company reserved the right to redeem to the extent .of
Rs.2,00,000 in any'year by purchase in the open market. The interest was payable half
yearly on 306 June and 31'r December and the same was duly paid.

89
 On 31"rDecember, 1997, the company purchased Rs.2,00'000 debentures at a cost
of Rs.1,9,,|,000. Pass necessary journal entries in the. books of the company upto 31"'
December, 1997 including closing entries on that date if the above redemption was out of
profit. (Adapted B.Com., Madurai)
Sotution Journal entries

Ail Redemption out of CaPital

lf debentures are redeemed out of capital, no amount of divisible profit is kept asidt
for redeeming debentuids. Profits are not utilized for redemption of debentuies and may g<
to.theshareholders by way of dividends. Redemption out of capitral reduces thgliquid resourcer
available to the company. Therefore, a company may adopt this method only when it har

According to the guidelines issued by SEBI, a company has to create Debentur

Redemption Reserve equivalent to 50% of the amount of debenture issue before redemptiol
of debenture commences,Thus, according to this provision redemption of debentuies wholl'
out of capital is now not possible. However, creation of debenture Redemption Reserve i
not required in the following casgs:

qn
 (i) Debentures with a maturity of 18.months or less.
(ii) Fully convertiblq debentures. Incase of partly converlible debentures, Debenture
Redemption Reserve is to be created for the non-convertible part in the same way as applicable
for fully non-convertible debentures.
When debentures are redeemed out of capital the following journal entry is made:
Debit Debentures Account
Credit Bank.
When debentures are reduced out of capital, nominal value of debenture redeemed
is not transferred frbm profit and Loss Appropriation Account or Debenture Redemption
Reserve Account to General Reserve.
Sometimes instead
naceod'

(a) Debit Debentures Account

Credit Debenture-holders
(b) Debit Debenture-holders A/ c
Credit Bank.
This method is preferable, as it doers not mix up the amount unpaid to debenture-
holders with the debentures account.
lllustration - 8
A Company on 31"r December 1996 redeemed Rs. 10,000 670 debentures oul of
capital by drawing a'lot. Similarly, the company on 3't "r December 1997 redeemed Rs. 15,000
60lo debentures out of profits by drawing a lot. You are required to pass journal entries in the
books of a company.
Solution
Journai entrieS
Rs. Rs.
1996 6olodebentures account Dr. 10,000 10,000
Dec.31 To Barik Account
(Beinq the redemotion of debentures out of caoital)
1997 6% debentures account Dr. l5;000 ,15,000
Dec.31 To Bank Account
(Beinq the redernption of debentures out of profit)
Profit & loss appropriation account Dr. 15,000 15,000
To debenture redemption resbrve account
(Being the transfer of profit to debenture redemption
reserve account)

91
lllustration - 9
ctebentures of Rs' 1'000
each at
on 1"'April, 1994, a company issued t,oo^0.!Ji of debentures
rlginning witn s1"t March' 1997 Rs'50'000
Rs.950. Terms of iu"uu p'ouioli'iriul every year' The
oy orawingi at p"rt o," by purchase in eh market
shourd be redeemed either 1995' The
issue amounied to ns.g,oob wnlch were written off on 31"r March,
expenses of the 31"t March
wrote off R..1o,od;;;'itl" oir.oun, on debentures every year. on
company year by drawings' On 31"
debentures to ou were repaid at the end of the
1997 the ruling prtce o
March, 1998 the company
p"t"n"t"a fro cancellation 50 debentures at the
'"deemed
lgnore income+:-
;ffi: ,hu feing Rs'100' interest is payable yearlY'
"*p"nr", sheet (as far as it relates to debentures)
on 31'
Give Journal entries and the Balance
march. 1998'
Solution
Journal entries

9,50,000 10,00,00(
Bank A1c
50,000
Discouht on debentures AJc
To 6% debentures A'/c
each at
(issue of 1,000 6% debentures of Rs'1'000

3,00
nlu".ntutut lssue exPenses A/c
To Bank Account
(Rs.3,000 incurred on the issue of debentures)
3,0c
Profit % loss account '10,0c
To debenture issue expenses Aic
To discount on debentures A/c
discount
(Being the debenture issue expenses and
on debentures written off)
60,0i
lnterest on debentures Aic
To Bank
(lnterest due on debentures for one year paid)
Dr. 60,000 60,0
1996 Gterest on debentures fuc
Mar.31 To Bank
(lnterest on debeniures due for one year palo)

92
Mar.31 frofit & loss A'lc 10,000 10,000

To discoqn! on debentures A,/c

(Amount written off of discount on debentures)
1997 Dr. 60,000 60,000

Mar.31 To Bank
(lnterest on debentures due for own year paid)
Mar.31 Account
Profit & ,oss I Dr. 10,000 10,040
I
To discount on debenture A,/c I I
I

Mar.31 6% debentures A,/c Dr. 50,000 50,000

To Bank
(Redemption of debentures worth Rs.50,000 by.
drawing at par)
6% debentures A,/c Dr 50,000 900
To profit on redemption of debenlures A'lc 49,100
To Bank
(for the purchase of 50 debentures in the market at
Rs.9B0 plus Rs.100 for expenses)

Mar.31 Interest on debentures A,/c Dr: 57,000 57,000

To Bank
(lnterest @ 6% on Rs.950,000 for one year)
Mar.31 Profit on redemption of debentures A,/c Dr 10,000
Profit and loss account ,
.Dr

To discount on debentures A,/c

(The writing off Rs.10,000 out of debentures
discount and also utilization of profit for the same

Falance sheet as on March 31, 1998

900 6% debentures of Rs. Discount on debentures Rs.
Rs.1,000 each
9,00,000 9,100

q?
lllustration - 10

on1"tApril1996NaveenLtd.madeanissueof50,00012%debenturesofRs'1'000
eachatRs.gB0perdebenture.ThetermsofissueprovidedfortheredemptionofRs.50.00.000
debentureseveryyearcommencingfromlggT-gSeitherbypurchaseorbydrawing|otsat
part, at the company's option' Proit on redemption'
if any' is to be transferred to capital
reserveaccount.Thecompany'saccountingyearendson3l"lMarch.lnter.estondebentures
is payable on 30h September and 31"t March'
During the year 1997-98, the company wrote off
Rs'1'00'000 from debentures.discount
purchased fro cancellation debentures
account. Duing the same financial year, the company
of the face value of:
(i) Rs.30,00,000 at Rs.960 per debenture on 30'09'1997'
(ii) Rs.20,00,000 at Rs.970 per debenture on 31'03'1998'
Showhowtheseitemswi||appearinihefinancia|statementsfortheyearending3l"'
1997.
previous year ending 3'1"t.March
March 1ggg. Also show corresponding {igures for the
Solution. Some Basic Calculations
1997
(1 ) lnterest on debentures for the year ending 31;t March
on50,000debenturesofRs.1,000eachi.e.,Rs.50,00,000fagevaluedebenltires@
12o/o e.a. = Rs.60,00'000
(2\ rch 1998
Interest on debentures for the year ending 31"t Ma
30 september, 1997
on Rs'50,00,000 debenture @ 12o/o p,a. for 6 months ending
Rs'30'00'000

On Rs.4,70,00, OIQ @ 12Yo p.a' for 6 months ending

Rs.28,20,000
31d March;1998
lnterest for the financial year 1997-97 Rs.68,20,000

(3) Calculation of profit on cancellation of debentures

On Rs.30'00,000 @ Rs'40, Per
40
Rs. 1,000
j.e',30,00,000x-- i- 1,20,000

On ns.ZO,OO,OOO @ Rs'30 Per

10
i.e.,20,00,000 x
Rs.1,000 ffi 60,000

Total proflt on cancellation of debentures 1'80'000

(4) Discount on issue of 50,000 debentures @ Rs'20 10'00'000 r:

94
Balance sheet of Navben Ltd. as on.31rt March, 1998 (Extracts)

31.3.97 Liabilities 31.3.98 31.3.97 ' Assets 31.3.98

Reserves & Rs. Rs. Miscellaneous Rs.

surplus Expenditure

Capital rdserve (to the extent not

secured loans written off)
1,80r000
12% Discbunt
5,00,00.000 debentures on lssub of
4,50,00,0 Qebentures
00 10,00,000 9,00,000

Profit and loss account of Naveen.L.td for the year ending 31'! March 1998 (Extlacts)
1996-97 1997-98 1996-97 1997-98

To interest on debentures Rs., Rs.

Rs,
60,00,000

(iii) Redemption by conversion

sometimes the debenture-holders of a company are:given the option to convert iheir
debentures into the shares or new debentures within a stipulated period. Such opiion iS
the
exercised by the debenture-holders only when they are very sure about the progress of
company. The new shares or debentures can be issued either at part or at a
premium of at a
discount. The following entry will be made :
Debit old debentures account
Debit discount on the issue of share/debentures
Credit new share capital/debentures account
Credit premium on the issue of share/debentures.
lllustration - 11
On 1$ April, 1997, Y Ltd', issued 8O0 12o/o debentures of rs'1,000 each at Rs'950
each. Debenture-hotders had an option to conved their holdings into 670 preference shares
,|998,
of Rs..l00 each at a premium of Rs.25 per share. on 31"tMarch, one year's interest
had accrued on these Debbntures which was not paid. A holder of 50 debentures notified his
intention to convert his holding into 13% preference shares.
Journalise the above transactions and draw the company's Balance sheet as at 31"'
March. 1998.
Solution
Journal entries
1997 Rs. Rs.

Apr.1 Bank A/c 7,60,000 8,00,000

Discount on issue of .Debentures AJc 40,000
Io 12o/o debentures AJc
(lssue of 800, 12% debeniures of RS.1,00
Rs.950 each)
1998 lnterest on debentures AJc 96,000 96,000
Mar.31 To sundry debenture-holders of the year ended
31.31998
12% debentures A,/c Dr 50,000 40,000
To 13% preference share capital A,/c 10,000
To securities premium A'/c
(Conversion of 50 debentures to 400 13o/o
preference shares of Rs.100 each at a premium of
Rs,Z5 per snare)
Sundry debenture-holders lJc Dr. 6,000 6,000
To Bank AJc
(lnterest on 50,12% debentures paid on conversion)
Profit Q.loss AJc Dr. 96,000
To interest on debentures A/c
(lnterest on debenture transferred to p, o/t !4/c)_

Balance sheet as on 31"t March, 1998

Liabilities Rs. Assets Rs. '

Share capital : Bank (7,60,000 - 6,000 | 7,54,000

400 13% preference Discount on issue of deoentures I

401000

Shares of Rs. 100 each 40,000 Profit & loss account I

96,000

750 12% debentures of

Rs. 1 ,000 each 7,50,000
Sundry debenture-holders .
90,000
Securities premium 10,000
8,90,000 8,90,00c

96
lllustration - 12
The summarized Balance sheet of X Ltd. as on 31s March, 2000 was as follows :

Liabilities Rs, Asses Rs.

Share Capital Goodwill 40,00,000
40,000 137o redeemable Fixed assets 82,60,000
Preference shares of Stock 90,00,000
Rs.100 each fully paid 40,000 43,00,000
Up redeemable at par Discount on debentures 2,40,000
8,00,000 Eguity shares of 80.00.000
Rs. 10 each fully paid up 1,20,00,000
. 127o debentures

(Redeemable at par) 60,00,000

Profit & loss A,/c 50,00,000
Bank loan ,10,00,000
Sundry creditors 18.00.000
2,58,00,000 2,58,00,000

The company decided to redeem the preference shares and debentures and in due course
offergd to the preference shareholders and debenture-holders the option to convert their
holdings into equity shares which are to be lreated as worth Rs.12.s0 each. one half of the
preference shareholders and one third,of the debenture-holders (in value) agreed to accept.
tfe offer.

The company issued 6,00,000 eQuity shares of Rs.10 each @ ns.tZ.SO to the pubtic
fqr cash and with the proceeds bf such issue, paid off the bank loan and redeemed the
remaining preferehce shares and debentrjres.
Solution
ln thei b6ok5'of X Ltd;
J6urnal entries
2000 Rs.
March 60,00,000
a{

07
 40,00,000

32,00,00t
8,00,000

T)r

Debenture redemption fund account

in securities
(ii) For amount kept aside for redemption invested
Sinking fund investment account Dr'

Or

98
 Debenture redemption fund investment account Dr.

To Bank. '

At the end of 2"d and Subsequent Y€ar

(i) For interest received on investment
- Bank Account. Dr.

To interest on Sinking fund investment A'/c

(ii) For interest transferred to Sinking fund

lnteresi on Sinking fund investment account Dr.

To Sinking fund account

('ii) For annual amount set aside
Profit & Loss appropriation account
To Sinking fund account
(iv) For annual instalment plus interest invested in securities
Sinking fund investment Alc Dr.

To Bank
At the end of last year (when debentures are to be redeemed)
All the entries eicept entry (iv) in second and subsequent year should be passed'
Entry (iv) is not passed as debentures are to be redeemed so no invebtment will be made
rather the securities will be sold.
(i) For amount realized on the sale of securities
Bank A,/c Dr.

To Sinking lFund investment A,/c

(ii) For profit on sale of investment

Sinking Fund investment A/c Dr.
To Sinking fund adcount

Note. Reserve entry will be made.if there is a loss on sale of investment.

(iii) For amount paid to debentureholders to redeem the debentures
DebenturesAJc Dr.
To Bank
(iv) For balance of Sinking fund transferred to
genoral reserve account Sinking fund A,/c Dr.
To general ieserve

99
luustratlon - 15
On'l"iApril, 1993, Metal products Ltd. issued debentures for Rs 1,00,000 redeemal
at part at the end of 5 years and it was resolved that a Sinking fund should be formed a
invested in tax-fee securities.
Give journal entries for 5 years, assuming that the interest received on the investme
was at ihe rate of 5 per cent on cost, that the interest was received yearly and immediat
invested and that the investments were realized at a loss of Rs.300 at the end of five yea
Reference to the Sinking fund table shows that Re.0.180975 invested at the end
year at 5% compound interest will produce Re. 1 at the end of 5 years.
Solution
For one rupee, the annual amouni required is Re.0.180975
For Rs. 1,00,000, the annualamount required is, 180975 x Rs.1,00,000 = Rs.18,098 (near
.'.
rupee),
Journal

{ ooa Rs.

April.l Bank Account .Dr. 1 00,00(

To debenlures account
(Being issue of rs.1,00,000 debentures at par)
1994 Profittand loss appropriatioqaccount Dr. 18,098 18,098

Mar.31 To sinking fund account

(Being the annual sum required to provide for the
redemption of debentures).
Mar.31 Sinking fund investment account 18,100 18,100
To bank account
(Being amount invested in taxJree securities to the
nearest hundred rupees)
1995 Bank Account Dr. 905 on4

Mar-31 To interest on sinking.fund

Investment AJc
(Being interest received on investments Rs.18,100
@ 5% p.a. for one year)

100
Mar.31 Interest on sinking fund inveslment account Dr. 905 905

To sinking fund account

(Being transfer of interest to sinking fund)

Mar.31 Profit and loss appropriation account Dr. 18,098 18,098

To sinking fund account

(Being provision of annual installment for
redemption of debentures)
Mar.31 Sinking fund investment account Dr. 19,000 19,000

To Bank Account
(Being annual installment Rs.18,098 plus interest.
Rs.905 invested in securities to the nearest
hundred rupees)
1996 Bank Account Dr. 1,855

Mar.3'1 To interest on sinking fuird.investment A,/c

(Being interest received on investment Rs.18,100 +
Rs.19,000@ 5Toforyear) ''
Mar.31 .lnterest on Sinking fund investment Frlc Dr. 1,855 1,8s5

To sinking fund account

(Being intereSt on investment transfened)
Mar.31 Dr. 18,098

Sinking fund investment Account Dr.

To bank Account
(Being annual installment Rs.18,098 plus interest
Rs.1 ,855 invested in securities to the interest
hundred rupees)
1997 Bank account Dr. 2,855

Mar:31 To interest on sinking fund

Investment AJc
(Beinq interest received on investments Rs.18,100

101
 2,855

21,000

'18,09,

102
 Debentures Account Dr. 1,00,000 1,00,000

To Bank Account
(Being redemption of Rs.1,00,000 debentures
par)

Mar.31 Sinking fund account Dr. 99,710 99,710

To general reserve
(Being balance of sinking fund transfened to
general reserve on redemption of debentures)

Note lt is assumed that investmenls have been made in multiplqs of hundred.

Insurance policy method
sinking fund insurance policy. can also be taken to make provision for redemption of
debentures. underthis method a fixed amount of premium is paid every yearto the insurance
company which in turn agrees to.pay the necessary amount for redemption of debentures at
the end of a specific period.
Journal Entries
First Year
(i) For'amount of premium appropriated from profit and loss account
Profit and loss appropriation account Dr.

To debentures redemption fund Nc

(ii) For amount of premium paid to insurance company
Debenture redemptiQn fund policy A,/c ' Dr.

To Bank

Note. These entries will be passed every year including the last year also.
The following entries will also be passed at the end of the specific period on reaiization
of the policy :

(i) For the amount received from insurance Co.

Bank account Dr.

To redemption fund policy AJc

(ii) Forhe balance ofdebenture redemption fund policy account (excess amount received)
- transferred to debenture redemption fund account
Debenture redemptibn fund policy Nc Dr.
To debenture redemDtion fund Nc

103
(iii) For amount paid to debenture-holders
Dr'
DebeniuresFJc
To BanK
redemption of und
{iv) For balance of debentuie
reserve
account transferred to general
o"t"n,ur" redemption iund account Dr'

To general reserve

lllustration - 18
on lsrAt
issue of Rs 5'00'0()0 9% debentures
A limiied company nas made an fund insurar
1996, the terms of which lncruie
tiat ihe company must take a 4 years Sinking
premiurr
at a premium of 5olo The annual
policy for the redemption oi Oufunt"""
each year by 6%'
hr.i,rs,ooo. rn" value of the policy incrgases
4 year'
to record the above transactions for
Give the necessary Ledger Accounts

Solution
Sinking fund account

1 ,15,000

1 ,21,90(
Rs.

1,21,00{

1,15,00

14,214

104
 ' Slnking fund insurance
1996 Rs. 1997 "Ri:

April 1 To Bank Account 1 ,15,000 Mar.31 By Balance cid

'1997

Mar.31 To sinking :fund Account 6,900

(lntJ '

1 ,21,900
1 ,21,900

1997 1998

April 1 To Balance b1d 1,21,900 Mar.31 By Balance c/d 2,51,114

April 1 To Balance bld 1,21,900 Mar.31 By Balance cld 2,51,11

April 1 To Bank Account 1,15,000

1998

Mar.31 To iinking fund P'/c (lnt.) 14,214

2,51,114 )c4 1

1998 1999

April 1 Ta B-alance b/d 2,51,114 Mar.31 B! Balance c/c 3.B8,0€

April 1 To Bank Account 1,15,000

1999

Mar.31 To sinking fund Account 21,967

(lnt.)
3,88,081 3,88,0f
,l oqo 2000
April 1 To Balance b/d 3,88,081 Mar.31 By bank Account 5,33,2(

April 1 To Bank Account 1,15,000

2000
To Sinking fund account 30,185
(lnt,)
5,33,266 5,33,21

6% debenture account
2000 KS, 1996 Rs.

Mar.3l To Bank Account 5,00,000 April 1 By Bank Account s,00,00c

Premium on redemption of debenturbs account

'
2000 Rs. 2000 Rs.

To Bank Account 25,000 Mar, By sinking fund tuc 25t0{

31
OUESTIONS
1 . Which of the following staiements are correci :

(a) A debenture-holder is an owner of the company'

(b) Debenture-holders get their money back only on the tiquidation fo th6 company.
to the company.,
(c) Debenture-holders wi|| be entitled to get interest even if ihere is
'loss
{djDebentureneednotbdfu||ypaidwhereasdebenturestockmustbefu||ypaid.
a discount and can be redeemed at a premium'
{e) Debentures can be issued at
(f) premium on debentures and premium on redemption of debentures convey the same
meanlng.
Ans. [Correct : (c); (d); (e)].
2. State whether the following statements are true or false :

(a) After the redemption of all debentures, the balance in the sinking fund is transferred
to general reserve.
(b)Profitonsa|eofsinkingfundinvestmentsistocreditedtodebenturesaccount.
(c) lnterest on debentures is payable only when a company makes profits'
(d) Interest on sinking fund investment is'credited to profit and loss account'
(e) Own debentures aciouni will appear on the assets side of the balance sheet'
(f) arq redeemed out of capital, entry for the transfer oJ profits to debenture
lf debentures
redemption reserve account is not passed in the books'
(g)Firstdebenturesarethosewhicharerepaidbeforeotherdebenturesarepaidout.'
(h) Registered debentures are thbse, which are transferable by mere delivery'
(i) Acompany cannbt buy its own debentures.
is with interest
(j) In case of debentures if the quotation i:.cu.r.n-ilter:sj it means that it
and for recording puipose interest is added to the total price paid'

Ans. lTrue : (a); (e); (0; (g), False: (b); (c; (d);(n); (i); 0)]'

. 3. What do you understand by a debentrir're ? Describe brielly the different types of

debentures.
4. What is debenture stock /
5.Distinguishbetween:(i)adebentureandashare,and(ii).debentureanddebenture
stock.

6. Give different considerations for which debentures may be issued'

107
 7. Write notes on : (i) Debentures Discbunt, (ii) Dbbdntures as Collateral Security,
Interest on Debentures; (iv) Ex-interest nad Cum-interest, (v) Own Debentur€s.
8. Discuss the various journal entries which are passed in the books of a company w
provision is made through sihking fund or insurance policy for the redemptiol
debentures.
9. Whal are the various methods of redemption of debentures?
10, What are the alternatives available for making lhe provision for redeeming debentur
ls it necessary to make such provision ?

11. Explain (i) redemption of debentures out of capital and (ii) redemptron ot debentr
out of proflt.
PRACTICAL PROBLEMS
1. A limited company issued 1,000 debenture bonds of rs.100 each at a premiu.m o
,pQr cqnt repayable ai part at the end of the 10h year. The deAenture bonds vr

pqyable 25 percent on applioation, 35 percent on allotment (including the premi

and the balance on Jirst and final call. All the moneys were received :by the comp
in due course.

You are asked to journalise the above transactions in the books of the company.
2. A limited company issued Rs.1,00,00O debentur.es, which were issued. as follow:

'1. To sundry persons for cash 61 96. per cent

To a creditor for rs.20,000 capital

expenditure in satisfaction of his claim "
To bankers as collateral securitv 25,000 nominal
'The
issue (1) and (2) are redeemable at ihe eird of 10 years at par. Hoi,v should.
debentures,be dealt wilh, in preparing the balance sheet of the company ?
1. Naveen Ltd. lssued Rs.1,00,000 1O per cent debentures on l sr January, lgg4atdisc'
oJ 5 per cent rep'ayabie in innual drawings of rs.25,000 commencing from
December following. The company's year ends on 31"t December. Journalize the ab
'iransactions
for four yebrs ending 3lstDecember 1997, assuming that the comp
. decided to write off debenture discount account during the life of the debentutes
' Ans. [Debenture Discountfuc written off :1994Rs.2,000; 1995; 1996rs. 1;00b; 1997 Rs.l

2. A cdmpany issues Rs.1,00,000 10 per cent debentures on 1" Apiilt :1994 at a disc(
of 5 percent repayable in annual drawings of Rs.25,000 each o:r 31"tMarch e
year. Calculate the amount of discount to be written off each year. The financial '
of the company ends on 31sr December each year,

108
 3. (a)

(b)A company purchases assets of Rs.2,60'000 and liabilities of R":10:9,09 t:t "."" '
of Rs,2,00,000. The purchase consideiation is satisfied by the issue of 9Yo debenlures,
of Rs.100 each at Par' Journalize'
(a) A company issued 20,000 10% debentures of Rs.100 each at a discount.of 5%
repayab|eafter.l0yearsatapremiumofSTo.Passnecessaryjournalentries.
rS.2,00,000]
Ans. [(a) rs,2,000; (b) Capital Reserve Rs'10,000; (c0 Loss on issue'of debentures
4, A company issued 5,000 debentures of Rs.100 each at pbr on 1"rJanuary 1995
redeemable at par on 31"t December '1999. a sinking fund was established for the
purpose. lt was expected that investments would earn 5% net. Sinking fund tables
showthatRe.O.l8OgT5apounttoRe.lattheendof5years@5%On3l"tDecember'
1999 the investments realiied Rs.3,90,000. On that date the company's bank balance
journal
stood at.Rs.1 ,45,6QO The debentures were duly redeemed. Give the necessary
entries, ledgbi accounts and assume that the investments were made to the nearest
Rs.10.

5. In the Balance sheet of a company, the discount on debentures ahows a.debit balance

Ans. [Balance in debentures account on 91.12.94 Rs.6,00,000; Balance in discount on

issue of debentures account on 31.12.94 Rs'6,000; interest on debentures:1992

109
 Rs.1 ,40,000; 1993 Rs.1 ,40,000; '1994 Rs.1 ,12,000; discount on issue of debentures writt(
off: 1992 Rs.5,000; 1993 Rs,5,000; 1994 Rs.4,0001.
8. A company issued Rs.2,00,000 6% debentures of rs.1000 each at par, repayable
: theendof 5 years at a premium of 5%. In terms of the trust deed, a sinking fund w
to be created for the purpose of.accumulating sufficient fund for the purpos
Investments were made yielding 5% interest received at the end of each year. /
. investments, including feinvestments of interest received" were made at the end
the year.
You are required to show, for 5 years, the -
(a) Sinking Fund Account; and
(b) Sinking Fund Investmdnt Account
Note. [Rs.2,7'1462 invested at the end of each year at 5 per cent compound interest w
amount to Rs.15 at the end of 5 yearsl.
9., The.dgbenture redemption fund account of a limited company stood at Rs.1 ,60,0(
rbpresented by rs.2,00,000 (nominal) invesimenis. The debentures stood
Rs.5;00,000 and the bompany sold Rs.24,000 investments at Rs.85 foi the purpos
of redeeming Rs.20,000 debentures at 102.
Show ledgeraccounts ignoring inierest etc.
Ans. [Profit on Sale of Investments Rs.1,200].
10.On 31"1 March, 1995, the Alka Traiiing Company Ltd. had a debenture redemptic
. fund of rs.5,00,000 represented by the investment amounting to Rs.5,90,000. Tt
company. has bank balance on 30rh September, 1995 of rs.60,000. The debentUre
amounting to rs.5,00,000 were paid off on 30rh September 1995..The security wr
sold for this purpose and realized 83% net and the proceeds were banked on 3(
September 1995. Record the aboVe transactions in company's ledger.
Ans. [Balance in Bank A,/c Rs.49,700/.]"
11.A'company had rs.8,00,000 59o debentures outstanding as on i"t'January, 199
redeemable on 31"' December, 1995. On that day, sinking fund was Rs.7,49,0(
representdd.by Rs.1,00,000 own debentures purchased at the average price oi rs.!
and Rs.6,60,OO0 3% stock. The annual installment was Rs.28,400.
On 31"tDecember, 1995, investments were realized at Rs.98 and the debentur€
were rbdeemed
You a1e required to write up the accbunts for the year 1995.
.
Ans. [Profit on Cancellation of own Debentures Rs.1,000; Loss on Sale of 3,
Stock Rs.3,200,k Balance of Sinking Fund Account transferred to General Resen
Rs,7,99,0001.

110
 uNlr -|
LES$ON - 2

sludenls till now we have discussed the issue of shares and redempiion of preference
shares. But there is another vital security like debentures which is issued to raise funds in the
form of a debt which is widely used in practice.

1. Meaning of debenture

2. Types of debenture

3. lssue of debentures

4. Interest on debenture

5.
I
Redemption of debenture

6. Review exercise.

MEANING OF DEBENTRUE - A debenture is a written acknowledgement of debt by a

company under its common seal. Interest is paid to debenture holders at a fixed rate at
regular intervals.

TYPES OF DEBENTURES - Debentures may be classified from different point of view :

(1) From security point of view : debentures may be classified as

(a) Naked or simple debentures
(b) Mortgagedebentures
Naked or simpte debentures : The debentures which do not carry any security in respect of
payment of interest or repayment ofprincipal amount is called as naked or simple debentures.

Mortgage debentures : The debenturegwhich are secured by a charge on the assets or

properties of the company are called as mortgage debentures. The debenture holdefs have
the right to recover their principal amount as well as unpaid interest outofthe assets mortgaged
by the company.

(2) Fr:om permanence point of view: from this point of view the debentures may be classified
AS:

(a) Redeemabledebentures
(b) lrredeemabledebentures

111
 (a)

(b)
any payment. is made k

payment of firs

debelStures. is knowri as second debentures'

(4) '
From recording Point ot v iew : Debeniures
maybe classified as

(a) Bearer debentures

(b) Registereddebentures
Bearer debentures -
Thedebentures,whicharetransferabletoanotherbearerwithoutendorsementar
ctlrrency notes are called as bean
they are just, like bearer cheques or government
debentures.

Registered debentures -
Thedebentures,whicharetransferabletoanotherbearerwithendorsbmentandfollowir
t"g"t tortulities, are known as regislered debenturis''
"oru
DISTINCTION BETWEEN DEBENTURES AND SHARE'

112
 DEBENTRUE SHARE

1 A person investing money in A person investing money. in shares is

debentures is called debenture called shareholders.

Debenture holder is a creditor of the 2. Shareholder is a owner of a company.

company.
.A debenture holder cannot A shareholder has costing power so he
participate in the managemeni of the can participate in the management of
company. the company.

+. A debenture holder gets interest on A shareholder gets dividend on shares

debenture and is paid in all and is paid if there is any profit.
circumstances whether there is profit
or tess.
5. Debentures can be converted into into
shares.
Debenture holders will get priirrity in Share hblders are paid after satisfying to
getting the money back at the time of the debenture holders.
liquidation.

7. There are no restriction on issue of 7. The share can be issued at a discount

debentures at a discount. only after fulfilling certain legal
formalities.

8. There can be mortgaged debentures. Btu there can be no mortgaged shares.

Debentures can be issued as 9. Shares cannot be issued as collateral

collateral security by a company. security by a company.

10 Debentures are generally redeemed 10. Share cannot be redeemed during the
within a fixed oeriod of time. life period of the company.

Distinction between debentures and debenture stock

Debentures need net be fully paid 1

up

2. Debenture can be transferred Debenture stock can be transferred in

wholly but not in fraction fraction also.
Debentures are identified by their Debenture stock is not identified by any
distinct numbers disiinct number.

113
STATES FOR DEBENTURE:
'
The following are the main stages of issuing debentures
(i) lssue of debentures
(ii) Creation of issue lor redemption of debentures
(iii) RedemPtion of debentures'

fSSUE OF DEBENTURES i

Debentures may be issued from different point of view :

1. Debentures issued for consideration

2. Debentures issued for Price
3. Debentures issued from redemption point of view :

From consideration angle the debentures can be issued

(a) For cash
(b) In consideration other than cash
(c) lssued as collateral security
Debenture issued fro cash
The debentures may be issued at par, at a premium, or at a discount' The followin
entries are passed in connection with the issue of debentures :

On receipt of application moneY

Bank AJc Dr.
To debenture application A,/c
(Being application money received on .. '...debentures @ Rs' per debentures
on allotment the application money on debentures allotted is . transferred t(
debenlures account :
Debenture application A,/c Dr.
To debentures fuc
(For the transfer of application money on debentures allotted to debenturer
accounl
Refund application money on rejected applications
Debenture application AJc n.
I o banK lvc
(For refund of the application on rejected application)

114
 due and
,"r,", *.,1* a ;t*ies wilt be passed for the debenture second call money
debenture 2^d call money actually received:
OF PRICE :
ISSUE OF DEBENTURES FROM POINT OF VIEW
From this point of view there are three different situations
:

(a) Debentures issued at Par

(b) Debentures issued at discount
(c) Debentures issued at Premium
Debentures issued at Palr
Debenturesaresaidtobeissuedatparwhen'theamountcol|ectedforitisequa|to
the debentures of Rs'100
the nomiflal value (face value0 of the debentures' for eiample
each issued at R.100.
lllustration - 1

X Ltd. issued 20 l2yoDebentures of Rs 100 each payable :

'OOO
after allotment'
' Rs.20 on application; Rs.40 on allotment; and the balance two months

115
 Journal
L.F- Dr.(Rs.) Cr.(Rs.)

Dr.

5,60,000
Debentures APPIication fu-c
To 12olo Debentures A,/c
"'l 4;00,000
1.20,000
To debenture Allotment fuc
40,000

lDr 8,q00,000
Debenture allotment FJc
9,00,000
To 12% debentures AJc
(Amount due on allotment on 20'000 debentures) I

AJ. 'l.O'
B"^k
7,60,000
To debenture allotment AJc I

(Balance oflhe amount due on allotment received) |

n.
Debenture call AJc
To 1270 debentures AJc
(Amount due on call)

Bank AJc Dr 8,00,000

To debenture Call AJc

(Amount due on all received)

116
 AT DISCOUNT
ISSUE OF DEBENTRUES
its nominar value (face
by company at a price ress than
when debentures are rssued is offered to
to be issued t' Oilto'ni' fot lxample' if a debenture of Rs'1 '000
value) it is said is loss to the
public at Rs.950, it Oi'count' Here Rs'50 o-n each debenture
'' "i "
i''["i"trJ'"
''"u"uoJ:; *tit"^:1,:|'t'ott lt is a capital loss and
company. As a principle " sheet' under the
off
"'
compreterf ii is shown on the asset side of balance
until it is written
'Miscellan"ou' g*p"'iiiures" as a fictitious asset' Discount on issue of debentures
heading mentioned'
on allotment' unless' otheiwise'
account is supposed to Ue atfoweO
The requisite entryto
. issuing debentures at a discount'
There is no legal restriction on
be passed is
(Amount receivable)
(a)
Dr (Amount of discount)
(Total amount)

on
(b)

bY the following illustration:

at a discount is well explain()d
The working of issue of debentures
lllustration 2- of debentures at discount)
{lssue
on April
of Rs 50 each at a discount of 10%
XYZ Lid; issued 2,000 14% debentures
1 ,1998 payable as folf ows
"' and
(discount to be adjusted with allotrnent)
Rs.30 on application; Rs'10 on allotment
was received in full'
Rs.5 on first and nnar cal' rne issi;;;;it;';ttiib"9.t"::l.i:iev
;" il;l;;;i.''l"Jg"' '"t*nts
and bslanc.g!:exgt onYL
Dr.
1998 Rs. Rs.
Dr. 60,000 60,000
Bank account
To Debenture aPPlication account
.h ! , irPP|ll,auv.r
--^,:^^{i^trlv'rvJ nn
-
? o00.lebentures received)
-'---
lEJell19 nr 60,000
60,000
Debenture aPPlication account
To 14% debentures account
resolution)
(Being allotment of debentures vide board's

117
 Debenture allotment account Dr 20,000 30,000
Discouht on issue of debentures account Dr 10,000
To debentures allotment account
(Being allotment money due and drscounl adjusted)
Bank account Dr 20,000 20,000
To debenture allotment accoun'
(Being allotment amount received)
Debenture final call account UI '10,000 10,000
To 14% debentures account
(Being first and final call due @ Rs.5 per de.benture)
Bank account Dr '10,000 10,000
To debenture final call account
(Being final and iinal call due @ Rs.5 per debenture
received )

14% DEBENTURES ACCOUNT

Dr. Rs.

To Balance 1,00,000 By debentures application account 60,000

c/d

By debenture allotment accounl 20,000

BY discount on issue of debentures 10,000

By debenture final call account 10,000

't,00,000 1,00,000

DISCOUNT ON ISSUE OF DEBENTURES ACCOUNT

Dr.

To 14% debentures account Rs. By balance dd Rs.

10,000 10,000

BANK ACCOUNT
Dr.
Rs. Rs.
To debenture aoDlication account 60,000 By balance c/d 90,000
To debenture allolment account 20,000
To debenture final call account 10,000

90,000 90,000

118
EALANCE SHEET {Extract onlY)
Liabilrties Assets

1,00,000 Bank 90,000

Secured loars :

zpOO,1Aok debentures @ Rs.50 1,00,000 Discount on issue of' 10,000

each debentures 1,00,000

lllustration - 3

Alimitedcompanymadeanissue,whichwasfu||ysubscribed,ofl,000debenturesof
being
Rs.1O0 each at Rs.97. The debentures were allotted on 31s! July 2001, subscriptions
payablel0percentonapplication,40percentonallotment,25percenton30'hSeptember
and the balance on 30th November 2001 '
Underthetermsoftheissue,paymentcouldbemadeinfutlyon3l"lJuly'2001'
interest on any amounts prepaid being allowable at the rate of 10 per cent per annumi such
interest was not deductible from the subscr'ber! payment, but was payable by the company
on 30rh November 2001 . The allotted of 300 debentures took advantages of the
prepayment
terms, while others paid on the due dated Journalize the entries to be made in the compdny's
books; (lgnore Debenture Interest)

lc.B S.E. 1992 (Delhi) (C)l

Journal
Date Particulars L.F. Dr.(Rs.) Gr.(Rs.)

2001 Dr- 10,000

(Being the application money received for

1 ,000 debentures at the rate of Rs. 10 per

debenture)
Debenture Application A'/c 10,000

To debenturo A,/c
(Being the transfer of application money)
Ju ly, Debenture Allotment AJc 40,000
JI Discount on Issue of Debentures AJc t)t. 03,000
To Debenture AJc 43,000

'(Being the allotment money due on 1 ,000

debentures @ Rs.40 each and Rs.3 per share
allows as discount)

119
 Bank AJc Dr

To Debenture Allotment AJc

,1n nnn
To Calls-in-Advance AJc
(Being the amount received on allotment and 14,100
also received of call in.advance on 300
debeniures @ Rs.47 Per debenture)
Sept. Debentures First Cdll tuc Dr.
JU To Debentures A,/c

(Being the amount due on first call on 1

'000
debentures @Rs.25 Per debenture)
Sept. Bank A/c or'] 17,500
30 Calls-in-Advance AJc Dr. 07,500

To Debentures First Call AJc

(Being the amount received on first call and
calls in Advance AJc is adjusted to the extent of
Rs.7,500)
Debenture Second and Final Call Fr/c Dr.

To Debenture AJc 22,000

(Beign the amount due on final call on 1,000

deb6ntures @Rs22 per debenture)
Nov Bank AJc Dr 15,400':l
30 Call-in-Advance.AJc Dr 06,600
I

To Debenture Second and Final Call AJc

(Being the amount of second icall received on I"ooo
|
700 debentures and Calls-in-Advance A'/c
I adiustedo
Nov. lnterest on Calls-in-Advance A,/c 345
eri
To bank fuc
gBeing two months interest on Rs.7,500 and 4
months' interest on Rs.6,600 @10olo per
annum)

120

t
l
Working Note :

Calculation of Interest on Galls'in'Advance

p.rsoo* 2 * I0 =Rs'125
:-'"-- l2 100
r
4 x ---:':'
l0
= KS ZIU
Rs 6'600 --r

ISSUE OF DEBENTURES AT PREMIUM

lfdebenturesareissuedatapricemorethanitsnominalVa|ue(facea|ue)suchas
if a debeniure of Rs'1000 is offered at
issue is called issue bt a pt"t'"' io' "t"mpt"' of issue price over face
1,050, it is a case of i'"u" ot'i"i"nt're1
at.qrSmium'
lhe it is to be credited to 'premium
^excess
gain for companyso
value is premium. The premium is a capital on issue 01
on issue of debentures' premium
on issue of debentures ac"o""i' Llx"'Oitt"unt
pt allotment' if nothing to the contrary is provided'
debentures is also realized ttin" ti*"
Premium on issue is a capltal Si"' t"'i'
it shown on the liabilities side of balance sheet
under: the head 'Reserves and Surplus''

The entries relating to premium will be

:

121
 Theamountofdebenturepremiummaybeusedforwritingoffdebentureissue
pi tiJt"t uit' or alternatively it may be credited tb
Debenture
expenses, discount on
"*"
redemptict fund (if any).
lssue of debentures at Premium
llluskation 4
of Rs'100 each at Rs'110 payable as
follows:
Acompany issued' 1,000 6% debentures
premium Rs'5)
Rs.30 on application (including
Rs.30 on allotment including premium
Rs'5)

Rs.50 on first and final call'

allotted' All money due was received' except
All the debentures were applied for and
final call on 20 debentures'
Pass jouinal enlries for the above'
JOURNAL

25,000
05,000

49,000

122
lllustration - 5 (lssue of d€bentures for a lump sum)

Journalise the followings :

(a) lssued 5,000 7% debentqres of Rs, 100 €ach, at par.

(b) lssued 5,000 7olo debentures of Rs. 100 each at 10% premium'
(c) lssued 5,000 7% debentures of Rs. 100 each at 1070 discount.

SOLUTTON : JOURNAL

Particulars L.F. Deblt Credit

(a) lssue at par Dr. Rs. .Rs.
Bank a/c 6,00.000 5,00,000
To'debenture application & allotment a/c
(Being 'application money received on 5,000 debentures
@ Rs. 100 each)
Debenture application & allotment a/c Dr. 5,00,000 5,00,000
To 7% debentures a/c
(Being application money transfened to debentures
account)
(b) lssue ai premium Dr. 5,50,000 5,50,000
Bank a/c ':
To debenture application and allotm€nt a/c
(Being.application money received)
Dr;

(c) lssue at a discount Dr. 4,50,000 4,50,000

Bank a/c
To debenture application & allotment a/c
(Being'application money received)
Debenture appiication and allotment a/c ,Pr: 4,50,000 5,00,000
Discount on debentures a/c Dr. 50,000
To 7% debentures a/c
(Being application money transfened to debenture a/c)

123
DEBENTURES ISSUED IN CONSIDERATION OTHER THAN CASH
Sometimes a company purchases a running business (assets and liabilities) and issues
to vendor, debentures as consideration. lt is called issue of debentures in consideration
other than cash. ln such situation followino entries are recorded.
l. When agreement of purchase of business is signed.

Business purchasea/c Dr, with amount of

Sundry assets a/c Dr. purchase

To Vendor's a/c

(Being sundry assets purchased) :

ll. When purchase consideration is paid to vendors in the form of debentures.

Vendor's a/c Dr. With amount of

To debentures a/c purchase consideration

(Being debentures issued as consideration for assets purchased)

Note : When debentures are issued in consideration other than cash they can b€
issued either at par, at premium or at discount. lf they are issued at premium the amount o
premium will be credited to 'premium on issue of debentures account' and if issued at z
discount. the discount will be debited to 'discount on issue of debentures account'.
As per iule purchase consideration (amount to be paid for assets purchased) shoul(
be equal to net assets (Assets purchased-liabilities assumed)value. But in practice sometimer
it is more than the value of net assets and sometimes it is less than the value of net assets

Extra payment made over and above the value of net assets is treated as goodwill
which can be calculated as follow :
Goodwill = purchase consideration - Net assets
Where Net assets = Assets purchased - Liablities assumed
In case the purchase consideration to be paid by company is less than thb value o
net assets, the excess of net assets over purchase consideration is a capital gain, which is
transferred to capital reserve account.
lllustration - 6

(Debenture issued in consideration other than cash)

Z Ltd purchased building for Rs.2,20,000. Half of lhe payment was made in cash and th(
remaining half by the issue of 12% debentures at a premium of 10%. Pass the necessaq
journal entires. (C.B.S.E. 1995)

124
 UTION
JOURNAL-Z LTD'
Dr. Rs. Gr. Rs.
2,20,000 2,20,000

Dr. 2,20,000 1,10,000

Vendor : 1,00,000
To bank account 10,000
To 12% debentures account
To debenture Premium account
and debentures issued in satisfaction
i#;;"vtJt;ade '
I
I
of consideration)

Working note :

issued
Calculation of debentures to be
:
Rs.

1,10,000
110

1,00,000
10,000

I
 Working notes
The ourchase consideration is Rs.2,20'000 against net assets being valued (2,35'000
- 40,000) Rs. 1,95,000. The difference of Rs. 25,000 is goodwill
when debentures are issued as a collateral security there ar€ two ways of treatment
.
in the accouhting books.
(i) No journal entry is made in the account books at the time of issue of such debentures.
A note is appended beiow the loan on the liabilities side of the balance sheet to the fact that
they have bben secdre:d by the issued of debentures. This will be shown in the balance sheet
as follows :

BALANCE SHEET (EXTRACTS)

(i) Liabilities Rs.

Debentures
(ln addition, debentures for Rs...... have been issued as collateral

LOan

(Secured by the issue of debentures of Rs...... as collateral security)

(ii) Sometimes issue of debentures as collateral security is recorded by

making journai entry as follows :
Debentures suspense a/c Dr.

To debentures a/c
(With nominal value of debentures)

The debentures suspense account willappearon the assets side ofthe balance sheet
and debentures on the liabilities side. When the loan is re-paiid the entry is reversed in order
to cancel it.
lllustration - 10 (debentures issued as collateral security)
A company had Rs.5,00,000 6% debentures outstanding on 1"tJanuary 1993. During
the year company took a loan of Rs.1,00,000 from bank for which the comp€iny placed with
bank, debentures for Rs.1,20,000 as collateral security. Pass journal entries, if any. Also
show how the Debentures and tsank Loan will appear in company's Balance Sheet'
Solution : First Method :
No entry will be passed for issue of debentures as collateral security. Only the entry
for bank loan will be oassed i.e.
Bank a/c Dr. 1,00,000 1,00,000
To Bank loan a/c(Being loan obiained from bank)

126

I
 BALANCE SHEET {Extract only)
Details Amount
Gbiriliqr-
Rs. Rs.

5,00,000
6% debentures
(ln addition, debentures worth Rs. 1 ,20;000 given to bank as
collateral security)
Bank loan
(Secured against debentures
collateral security)
Second Method
In addition to entry fro bank loan following entry should also be
oassed:
nt 1,20,000
DebeFture suspense a/c
To 6% debentures a/c.
(For the issue of Rs.1,20,000 debentures as collateral security for
a loan of Rs. 1,00,000 from the bank).

BALANCE SHEET
Rs. Assets Rs
Liabilities
6% debentures 6,20,000

(lncluding debentures for Rs.1,20,000 issued as

collateral security)
1,00,000

lllustration - 11

A LiO. pecuied a loan of Rs,1,80,000 from the canara Bank by issuing 2,000,
1506

debentures oi Rs. 100 each as collateral security. How will you treat the
issue of such
debentures ?

[C.B.S.C. (Foreign) 1991 (C)l

Solution
1. First.Method (when no entries are passed in the books)

127
 AN EXTRACT OF BALANCE SHEET OF A LTS' AS AT...
Li"biliti"" Rs. Assets Rs.
'1
Secured Loans : ,80,000

Loan from Canara bank (Secured by the

issue of 2,000, 15%
Debenture of Rs. 100 each as
Collateral securitY

. Second Method (when entries for debentures are passed)

JOURNAL OF A LTD

L.F. Dr. (Rs.) Cr. (Rs.)

Particulars
Detentures Suspense fuc Dr. 2,00,000

To '15% debentures AJc

AN EXRACT OF BALANCE SHEET OF A LTD. AS AT ...

Rs. Assets Rs.
Liabilities
2,00,000 Miscellaneous 2,00,000
Second Loans :
Fxpenditure:
2,000, 15% Debentures of
Debenture
Rs. 100 each (issued as collateral security)
Suspense AJc

Loan from Canara Bank 1,80,000

(Secured by the issue of 2,000, 15%

debentures of Rs.100 each as collateral
security)

lllustration - 12

A Ltd. issued 5,000, 13% &bentures of Rs.100 each at part and raised a loan.of-
Rs.80,000frombank'co||atera||ysegured.!y-ss'1,00,00013%debentures.Flowwi||you
show the debentures in the Balanbe dheet ofthe company assuming that the cornpany ans
recorded the issue of debentures as collateral security in the books. [C.B.S.E. (Foreign)
1ee2 (c)l ;

128
Solution
SHEET
AN EXTRACT OF BALANCE

Liabilities
nr-Tn""uts I
ns'
]

S,OOooOfCutt"ntAssets : 5'80'000
Secured loans: i
5,000 13% debentures of lBank I
1'00'000
at Par I Miscellaneous I
i RS.100 each issued exPenditure
l- 't
| ,oo,ooo I
ot I
i 1,ooo 13% debentures I lDebentures I
1..
| *.. , oo each (issued as collateral
security)
I l.u"o"n'" I

I lAccount
i

banK
i Loan from I
of 1'00O debentures of l 80.000 I I
i (Su"ur"d by the issue
I Rs.1o0 each)
OF VEIW
OF REDEMPTIONI' POINT
CLASSIFICATION FROM'CONDITIONS
of debentures
part' premiurn or discount the redemption
Like issue of debentures at
can also be :

(a) RedemPtion at Par

(b) RedemPtion at Premium

(c) RedemPtion at discounl

formed
Thus following sets of cases can be
:

(i) lssue at Par, redeemable at Par

(ii) lssue at discount, redeemable at par

. (iii) lssue at premium, redeemable at par
(iv) lssue at par, reoeemable at premium
(v) lssue at discount, redeemable at premium
(vi) lssue at premium, redeemable at premium
wither at paror at
of ubou" sets clarifles that debentures are redeemable
The siudy provided in the prospectus
*o o" redeemed in future is
or"*i";.";';;e Jeuentures
"'"
time of issue' Sometimes a company can
also redeem tts
issued by the company at the
is normally seen tha!
purchase i'ot op"n t"t"t' Generally.in su,1l cases it
debentures. by
par value' thus making profit on
redemption'
company buys them at below the

129
 for
ror r>luev
issued at pad
sr r-'- and
-' redesmable at par
Journal eFtfles
eFtrires
: .,---*" ^^^^"r,i.rb,"loat
Dr.
(a) Bank a/c ' .. - ^n^r-^^i a/.
Dr.
(b)
lle
(ii) Wh enc
Dar Dr.
(a) B? Dr.
Dr
(b)

issueo at Prvrrrru'
(iii) Whe n debentures afe
at p€ It :. Dr.
Bank a/c

ffi
Grl. l:^^ ^^A .ll^lmenl arc
Di.
(b)
To Debentures account
To premium on issue of
debqntur:s ?J9:
at p'"""""'
::
(iv) fr-hen issued at par and redeemabte Dr.
(a) Bank a/c
, --r:^^ri^- .nd all^tment a/C
Nominal value)
(r r) In
and

(v) at discount reoeentali'.'

o' t''""''-"' ' ---t
lwhr lh issued With actual
l(a)l Bank a/c . ,,-L^^. -r^ I
'
amount received.
Dr.
(b)
atc
Loss on issue of debentures Dr.
To Debentures a,c
a/c
ii;;;il redemption of debenlures
""

,t ?n
m*$$$'mg'g*ffi
assets side of
he balance sncv'

be
-"

explained
'

with the help of

following illustrations
"t' Thu ru.h"nism
can

-13 :
,tlT""'',* *" following,trans-actrons

n;
{,""**at$*:i*tfi"':'* s Rs' 100' [C'B'S'E'
(Delhi set lli
face value of each
debentur" j.rr;n

131
 - 14 (lssue ar
qtsu.,q'
at discount redeen\ed "t-:'::::]
,tration
lltustration of 10% with the condition
p.Ltd., issues7,000
'
debenluji . _
res of rs 10O each at a discounl
.

three years.
,n",,n5,!1n i',ii5?J;3li'XlT
tese shall De reut,('rr'ev
q' ffi
- r' u'
"i
i"r" -n6rrheexotryof
^...o/
"-" 1:: ::: :':: ;:::
:,: ion of these debentures
;
and redempu-
' Pass the necessary iourna'.:it':t-tl::X:sue
utt".. t'!?*-p',rr,"oi;;;; t;;"
(c'B's E' 1ee3)
Journal of P Ltd'
Solution

Rs.
Working Note :
70,000
Loss on issue of debentures
35,000
Discount on issue
1,05,000
Add: - Premium or redemPtion
lllustration - 15 redeemable
15% Debentures at a discount of 5o/o

A company issued Rs'' '00'000'

1
journal entry'
ro'u*tJ "lpr"mium of 10%' Pass
"n",
lC.B.S.E. 1991 (Delhi)l

132
 .r-

( A/c
A/c
debentures
i on issue of

lSYo debentures ,,-r of debentures Nc

premium payaurv
orernium payable v"
on '---
redemptor
ar
so/o and
ri-^nr rnt o{ 5o/o
discount
ring tne issue
of "'
:::il:llTril
Pre{l
r""i*uur" at a
 lllustratiort - 17

Youarerequiredtoshowby.meansofiourna|entrieshowtorecordthefo||owing
issues :

a discount of 5% to be
(i) A company issued 14,000 debentures of rs'100 each al
repaid at Par at the end of 5 Years'
A company issued 5,000 debentures of Rs'100
each at a discount of 57o repayable
(ii)
(Outside Delhi) (C) 1996]
it a premium of 10% at the end of 5 years' [C'B S'E

Solution Journal

L.F. Dr.Rs. Cr.Rs.

Particulars
Dr. 13,30,000 '14,00,000
(i) Bank A,/c
Dr. 70,000
Discount on issue of debentures AJc
To debentures AJc
(lssue of debentures at 5% dlscount)
Dr. 4,75,000 5,00.000
(ii) Bank AJc
Dr. 75,000 50,000
Loss oh issue of debentures A,/c
To debentures fuc
pJc
To premium on redemption of debentures
(lssue of debentures at 5% discount and 10%
premium on redemPtion)

lllustratign - 18 (lssue of debentures - different terms of issue) '

Record iournal entries in following cases :

par'
(a) lssued Rs. 1,00,000 12% Debentures at par, redeemable at
at par'
(b) lssued Rs. 1,00,000 12% Debentures at discount of 10%' redeemable
par'
(c) lssued Rs. 1100,000 12% Debentures at a premium of 5%' redeemable at
premium'
(d) lssued Rs. 1,00,000 12% Debentures at par, redeemable at 10%

(e)|ssuedRs.1,00,00012%Debenturesatadiscountof5%,redeemab|eat5o/opremium.
of accounts'
Also state how you will treat the loss on issuo of debentures in books

134

L
 at Par
G"*J ,t Par, redemption
BanK a/c
allotment a/c
io oLo*ntutut application &
-
iJa-n=g appilcatlon money received

debentures

135
lnterestit on Debentures
tne
Debentures runt. While paying
::T:#Jff:#ili;';;l; *"'"""'
is charged 1o r'le ptuttt ' '- '-
debentures''
rnterest on debentures
lnterest :l*q,"-1'^". :T to deduct the.income
it': tT ::]ln^1Ti:i,*"J:Hil'.T#ilii""*t
0"u"","'"":.'lll
intu,".ion I"o"ntures'
't"'n"d *i*'entries are
payment
ll""?ll:X1[:!|}il::|i'iJ'.ii"
oT lntsrci'r rv v'"'
-
"*"insiournarentries
'n,",".'i"""
tax before making
passed in ihis connectlon
:

::Tl?1liii""i$"ilil:-r"""""'TH""ni'in"i'u""ounti'o"ur
credited.

Rs' 10'000
ith the gross amount
loss accouni will be debited
ttv

136
 heading
in the balance sheet as liabilitv underthe
will be shown
[,r.,ffi-,o,ooo)
tax Payable account'

'T:',L"J,:Jffi","1"y:":;::ff':,[:,-?;'"'H::"j"ffJYJ^l,T::ili:'ix'""Jli1?';
reqr
. following three Problems

il jm':,'*lt$:',";"J,';:"-i#iEFHfl
i.th::?::|" jjr,ffi 'f'"tj
runmu{**im?r:i:i"::i#i*ffi
the res
de be ntu
n re
eve bero rn€ ';ii:**:m:l
;H;;i;l ": {T*::: ?:illl1l[.*,""T,,1}i
Hl::::'l',1["J;!l'iifi#fi?].'ffi:* *:n::; Li"l," in" deben,ures

iHffi :[li:'::'j"ffi 'ffi inilIpo"iur"u"Y"i.1i::i,i:"#:,:f ;:ffi ]

tttt'* r#
[i:ffJ,:1filHf::"W"tlmt:* *',H] 1 :
'"ffiifrliii*"ifu ldi*fr $***:#*'***i*'"'w
::'ff fff'.::i[,";,"'*l']rH+#tr*i:f :J,il:"#"mxfff
redeemed bY Purchasing th
discounr
l:fiirfr
i'e'' either at Par or at a '
;;;';;ftiototation'
ii""".f"^*,n""L'""'mTyl$*i:',",'.'#J::HJt":::T,llli,T';"'11
:$:'T*r"ffi il::
'il"ffi il,d*$**':lt,ffi
{i) RedenPtion
';;:,j,ji.i
of Profits
out
journal entries will be
out of profits' the fctllowing
When debentures are redeemqd
sssed.
on redemption
ia) Entry for amount paid
Debii debentures aicount
Credit Bank

ib) Entry for transfer of Profit

account
Debit prolit & loss appropriation
' Credii debenture
redemption reserve AJc

137
 Generat
is transferred to
required for redemption and
D'R'R' Nc is not
(c) When balance of
Reserve Accounr
account'
auU"ntu'" redemption reserve
OeOit
general reserve
credit general
Credit .- for all purposes'
and will be available
reserve rrev '":-.
a {ree reseNe
general reserve is
rs d :
a
The balance of
The , corhpany withholds
ic rhat the cof\pany
! --^nr- ia
"*oiour"'u'neo'n the business
red:Ttl:i:ff1,?lJj:ilffi ffi;
of redemption.of
effect or
rhe errect
debent::::*;]"ff;i5''n11'iil'"";;;;"in'the business

part of the divisiblt

t-::;:" 9illll]llT^^"",.".
; ;;;;" ot internar rinancins'
lllustration-? a companyissuedR"''-11,'?t'''l^t#"""["Jffi:t;j":ff:i:l
On lsrJanuary' 1997'
-
-, - -^*^o''', resewed rne r
in"'i"i"Lt was pavabre harf
repayabre in five vears "o"::::j:"T1Hffiftilt'
in. was durv paid
n".z,oo,ooo
;; l::lil#;,[oJ,
'"I
dtt
rno
"u*e
,n"
;;il 30'n J une n

tt"'#'il;;i
r?;;; "".pany
.a .purcha sed
:i i;it;??l"t iiilJ::T ffi
".',1
on 31", Dec6mb". uur o{
"n,ii"" 'l ln"_:;" redemption was
of Rs.1,e1'000 l"::i::",il:il;;";;
includlng.(
that date if ti above
December, 1997
i.in.joo*"oB.Com.,Madurai).Journalentrie5
Solution

42q
l##N*lt*****r*m-W
lntb**'u***nr******ffi
'":.'rufi,|:ilfi ::::""i{ir#ffi ,,f"."",,#ffi
::ff ::r;
Hfl
entry is made:
dtf;*fiil"J'ffiiiiii,"". out or capita,ihe
ro,,owins iourna,

when debentur"" "tll"oln"J"*niures Account

ii" itbeniures account'

n"'o"r" of
"'in
- 8 10,000 6% debentures.out
ru'
lllustration redeemed Rs'

lY*m::l'i;l?"113
.--lii,x*tll$trffii*;;n;;lTJ"'fi'ff
lHi'J'H'loil'"1o"n"'len'lriesn
;unl:l'iil::t$nnltil-ryru:ilif
a company'
looks ot
Solution
Journal entries

"'""t'"il",llorir, 1ee4, a companv,:,r."d l;.?oL3"Jli:1"$!l'i,".liJ;J"?:H":I$

ftrtri'5f ii'l,tillt$t'i,ii't*,'
rTr?#Hffi i[an':*::"*l;;;Fi:]*fu i:l]"r,""T:r*lm;::;
"'***-****;l.i".l$ft
x*l ;:*:::B:H,'J::ffi:fl [::iffi5Ht;rl
(as far as :;r:,rn";ns,
.n 31 "'
Balance sheet
entrieS and lhe
Give Journal
march. 1998'

140
cl

et

ffi l. rt{arctr 3{' 1998 KS.

-l i

Discount on
ul'uv'rer -- '
Rs.
9,100
I s.oo,ooo
I

141
{.

'
{. . ,;i*
, ':t'
"''"'":;lr;,,1.'^'.'^:I:::T#,H*li{:;ff ::;trHi+$Tii::"#:T
ar Rs.980 Per debenture' by t,n
^ar:h
l'nont"'es every vear ;;;; ,;;; 1997-98 eilher
*tt:";:;?J';',"i..p,'ii'^'llll* ,o o" transferred to
caprLar
on debenrures
on sr"' nr.,"n. rnrerest
;;, ;l
i"":::',il:fJ:"fi i"i.oJntin-s y"", "na'
reseNe aecounl. tta """'r- ',
t
6 31s Mar0h,
septemb"'u',n"*rorrwroreorrRsr.00;TlJ:l::i,:l::':il:ffi[:
i. puv'rr" on 30'n
ns the ve ar esl^t#;;
1
pu'"n u
r::'',; ;'.or pu ny
D u ri
llna
account During the same
of the face value
of: .oo7
^^ ^.,
per debenture on 30'09'1997'
(i)Rs.30,00,000 at Rs'960

ffi :1*ffi :l:::'ff nu'il"-':,:l"*l::"J::':":;tr;;ri,"J:r?;#

figures the prevto
fq1
show corresponding
March 1998' Also
' Solution' Some Basic
Calculations
1997
for the year ending 31st March
(1) lnterest on debentures
i'"" Rs'50'00'000 face
value debentures @
On 50'000
(l****' t'*''t'OOO "utft

irnP'a' = Rs'60'00'00!
31"r March 1998
for the year ending
(2) Interest on debentures

ending
12% p'a' for 6 months
On Rs'4,70'00'000 @ Rs.28,20,000
31"r March' 1998
'1997-97 ni s1:o'ooo
the iinancial year
rnrerest for
on cancellation of debentures
;a; calculation of profit
Rs'40' Per
On Rs 30'00'000 @
40
;e..lo,oo,ooo*ffi 1,2o,ooo
Rs. 1,ooo
Rs'30 Per
On Rs'20'00'000 @

Rs.1.,000 'e',zo'00'000*fs00 ,
of debentures
. ^-,,,^'.to* .1.80,000

Total profrt on cancellation 20 10'00'000

debentures @ Rs
(4) Discount on
'"'ul'o'UO'*O

142
 d March, 1998 (Extracts)

Balance she€t
of **""" -ill
31.3.97
I

5,00.00,000

{ir 1nd -r
[O SS aCGoutrr
^f Nave€ll 19s7-98
1996-97
1997-98
Rs.
1996-97
r" t6ilil6-"t-es
E.' lR'. I
Rs. l
58,20'000 r I
I
60,0u'uuu

( ) :::il::Til;3;:Jy;s1"J;""ffi::Tnr
til!111"!.::;* ;:"#:T:-:
::tnn:nr":"'r;::""i;;;'"'i'u.."'l
*1;;:;iitfrTgi'ffi account
Debit old debentures
of shareldebentures
on the igsue
Debit discount
account
new share capital/debentures
Credit
on the issue of
share/debentures'
Credit premium
- 11 -:.,
rrrustration
- - yw. irru"o 800 12Yo 9:'. ":Y:."^:ffi i;$,:t"""J;:T"X
.^*;;:il:11"f:JJ'""i:";J*ffi ';!:::1ff ':['fl :?;;:;ffi ;;lif:::,1["J?'J
notn'leu
:?il.ffi"#;' " o:T:i,::::il'li,:,i; iiiilo."nnoro"' ot so debentures

13% prererence':1":::0".r, as at 31"r

Barance sheet
fi1:if:",:t"ilJlffiiliil'"t 'i" and draw the
c'
transactions
Journalise the above
March, 1998'

143
 Jouinal entries

sheet as t" ttt*"t"n+n9t

"",un"u

144
 -

:ration - 12 was t15

or I u'"' as on 31d March,2ooo ""
summarized Balance sheet

-nare CaPital
40,000 13% redeemable
of
Preierence shares
Rs.100 each fully Paid
at Par
UP redeemable
shares of
8,d0,000 Equity
uP
Rs. 10 each futly Paid
12olo debentures
(Redeemable at Par)
PJc
Profii. & loss

Bank loan
Sundry creditors

X Ltdt
ln the books of

145
M RedemPtion out of Provision
in advance to repay
the company to
si always a wise policy for
It T'"9u-1:tlg"t"nts ptovrsron
This can be done bv making
the known liability for *t"il;; ;i;f"ntuiu''arrange lumpsum to repay debts
This is
otherwise it will be aim"urt toiineic";;;;i"
;';*-g ft;;;;*hod orinsurance policy method'
possible
.: by adopting either the

Sinking Fund foi redemption of debenturos .. . , ,,.-- tro makesome arrangement

paid on a specineO Oate'.ff-sif,elirable
Debentures are to be
'ilT^?:
f
",,h;;1;;p;;:T::.*Ji[f l*lyxil:T:in"#:'i:l':1"'i'f;
ffi Jn:YfJJ::.:T:J:1"'i":ff
undmethod ilil;;;'tnf
:
entries will be Passeo
To recapitulate' the fol lowing

At the end of the l"tYear

year
(i) Forthe amount set aside every
ur.
accounr
Profit & loss appropriation
To Sinking fund account

^r
accounl
Debenture redemption fund
' '- redemption invested in securities
(ii) For amount kePt asroe I''or
Dr'
Sinking fund investment account

146
 -t-

or account
Dr..
{un(I investm€nt
Debenure redemption
To Bank

,,.. ;"' *t t"::"^:::,::il.

\ ":;;
For interest
received on
lr
Or.

Bank Account Nc
on Sinking
furld investment
To interest
Dr.
tii)'"""tt""tt'""""t:"t,t";$::::::*""
\"' {und
Interest on sinking
account
To Sinking fund
set aside
(iii) For annual amount
account
o,"ot n ** approPriation

,h,\:::H]]J:,n"|"fiHp*tusinterestinvesteoinsecuriti;,.
*w' investment
Nc
Sinking fund
To Bank are 16
g6 ledeemed)

.
^. the
At end of last Year
(whetr debentures
? i lff"'","J::l'",ii J""ffi"
the entries
^,
",":{,Tfi*L:1n:";1r;*il
ilfl ,.ll'Jill"l"T$:: i":c '
For amount
iealized
; "r
securities
t
.() \
Bank Nc
Fund investment
Nc \
;; ;'*t"s
investment
sale of
rii\
\r' For profit on
"*\
sinring Funo
investmentA/c \
ro sinkins {und
t""l"Jlo" * *1*i")"i.Yt
n,n*e is a loss
Note' ReseNe
e* lil"ff;,"no*o" to redeem the debentur\
paid to debenturv""'- Dr'
(iii) For amount \
Debentures rv"
To BanK

147
 to
fiv)
\''' For balance of Sinking fund transferred
AJc Dt''
oJn",ait"."." accouni sinking fund
To general reserve

llJustration - 15
on.l"rApril,lgg3,MetalproductsLtd.issueddebenturesforRs'1'00'000redeemable
that a Sinking fund should be formed and
p"n Ii ti"JnJ'of 5 years and it was resolved
"t
invested in tax-fee securities 'it '
assuming that the interest received on the investments
Give iournal entries for 5 years'
the interestwas re_ceived yearry and immediately
was at the rate of b per cent on cost, that years'
at a loss oi Rs'300 at the end of five
invested and that the investments were realized
that Re'0'180975 invested at the end of
Reference to the Sinking fund- table shows
1 at the end of 5 years
year atSohcompound interest will prbduce Re'
Solution
Re 0'180975
' For one rupee, the annual amount required is
x Rs':1,00,000 = Rs'18,098 (nearest
.,. ro, R". t ,oo,oo0, the annual amount required is, 180975
rupee).
Journal

Bank Account

Mar.31 To interest on sinking fund

lnvestment AJc
(Being interest received on investmentrs
Rs.18,''00 @ 5% P.a' for one Year)

148
149
 Mar.31 Interest on sinking fund investmenl account Dr. 2,855 2,855
To sinking fund account
(Being interest on investment transferreo
Dr. '18,098 18,098
Mar.31 Profit and loss approprialion account
To sinking fund account
(Bein$ provision of annual sum for redemption
of debentures.
Mar.31 Sinking fund investment account ur. 2'1 ,000 21,000
To Bank account
(Being annual investment Rs.18,098 plus
interest Rs.2,855 invested in securilies to the
nearest hundred rupees)
1998 Bank Account Dr. 3,905 3,905
Mar.31 To interest on sinking fund
: lnvestment A,/c
(Being interest received on investments
9Rs.18.100 + Rs.19,000 + Rs.20,000 + Rs.
21 ,000 =Rs.78,100) @ 5% for onCfqeo_
Mar.31 Interest on sinking fund inyestment account Dr. 3,905 3,905
To sinking fund account
(Beinq transfer of interest on inveqtments)
Mar.3'l Profit and loss appropriation account Dr. 18,0S8 18,098
To sinking fund account
(Being piovision of annual installment . for
redemption of debentures)
Mar.31 Dr.

Rs. 78.100 - Rs.300 loss = Rs.77,800

Mar.3'l Sinking fund account Dr. 300 300
To sinking fund investment account
:
(Being loss on sale of investments lransfered)
Debentures Account Dr. 1,00,000 1,00,000
To Bank Account
(Being redemption of Rs.1,00,000 debentures
at bar)
Dr. 99,710 oo 7ln
Mar.31 Sinking fund account
To,geheral reserve
(Being balance of sinking fund transferred to
'qeneral
reserve on redemption of debentures)

150

.- -.=_.:--.._-.-'+_-.-
 of hundred'
investments have been made in multiples
Note lt is assumed that
lnsurance policy method of
also hzt r,kan ro make provision for redemption
be taken
policy can ! to the insurance
Sinkinq fund insurance
o"ounti,u*. unoer this
method a fixed;ff::j:jffH"i'Tffi;;;"ar
H;;;;i;; of debenrures at
which in turn agrees
comPanY
rhe end of a speci{ic
penoo r.H:1il:l"'
profit and loss. account
For amount or premium ifi:i:::""i""*
a(
Proiit and loss appropriation
{und FJc
roluu"ntut"t redemPtion
paid to insurance company
(ii) For amount of premium
funO poficy
ptlc Dr'
Debenture redemptton
To Bank the liast Year also'
entries will be passed every year including
Note. These specific period on realization
tif f
i'o ou passed at the end of the
The following ent'lu'
of tne PolicY :

from insumnce Co'

{l) For the amounl received Dr.
Bank account
io redemPtion fund Policy FVc receivec
redemptioniund policyaccount (excess amount '
{ii)
\tti For he balance of debenture
fund accoum
to debenture redemption
-irun"to*o tund policy Fi/c Dr'
Debenture redemption
io l"o"ntut" redomption fund AJc

(iii) For bmount paid io debenture-holders Dr.

Debentures lJc
To Bank nt transferred to
general resefve
redemption of und accout
(iv) For balance of debeniure
fund account Dr'
Debenture redemplton
To general reserve

lllustration - 18
9% debentures on l"tAprii'
made an issue of nstf'lf
' A limited company has
'OOO

lee6,thetermsor*ni"nin"ili"iiJt-th-ecompanv-must:il11ir::lt"i[t"]':':;TilT
;:il ;;; il*o"Tt'"^i.;:
::ffil[n::J"ll".lil
Rs.1,15,000.ThevalueoTrnePurrvv"*'*--- .. ,
*,* .-^^.a.ri^nq
-..^ transactions for 4 year'
the above
vear.
Accounts to reiord
Give the neceseary Ledger

151
 multiples of hundreo'
investments have been made in
Ncte lt is assumed that
lnsurance policy
method make provision for redemption
of
policy can -,^^
also be
'.z,
r,kan
laken t:,T:.,0
to
sinkinS funcl insurance rearto the insurance
o"o"n,,i,o* under this
m,,th"e f}iT|:::i::ffIiIli H;;;iion"u"o or deoentures at

company which in lurn agrees

ihe end of a speci{ic
pertoo'
Journal Entries
Flrst Year
profit and loss account
appropriated from
(i) For amount of premium
account Dr'
Proflt and loss appropriation
fund AJc
ro-iuJ"nt"uu fedemption
paid to insurance company
(ii) For amount o{ premrum
iunO policy Aric Dr'
Debenture
'"d"*puon
To Bank
the last year also'
will be passed every year including
Noie. These entries period on realization
at tire end of the specific
rhe followins ent''"' ;;;;;;assed
of the Polrcy
from insurance Co"
(i) For the amounl received Dr'
Bank accounl
Ar/c
To redemPtion fund PolicY (excess amount received)
redemplt""'tu",d
{ii) For he balance of debenture l:::'"ccount
to debenture redemption fund account
- iransferred policy Filc Dr'
Debenture reo"mptiln'iuno
fuc
io debenlure redemption {und
(iii) For bmount paid io
debenture-holders Dr.
Debentures AJc
To Bank r---^a *^
transferred ^a,,arel reserve
to general rese
redemption of und account
(iv) For baiance of debentur'e
fund account Dr'
Debenture redemplion
' To general reserve

*'T;;;""mpanv
lllustration - 18 rres on 1sr Aprii,
has made an jl"?;lljll lj'lllll#,j?l
vJ:9"ffi"*i!{ry}:'S::::*';:';:ffi'.i}1}'3':il:nT
,,,,,iJ'[lli:":"#ffi annua' premu rr s
rhe
lolicy for the
-.:1each year by 6%'
;3i:iHJil:i:::ffiXi|i!#H*j:i:'n*,*g:
(eoen t;rttu'
' :'
lor'"u
Rs.1 5,000. The value ot tne I ror 4 vear'
,1
""t"utes
to record the above transactions
;''JJ;*'""J;Jn;';""tnts

4E-4
 accog!
Solutlon sintrln-g$9 .-.-1-; I t\i.

r^cq 30P l r'' 5,00u ^

1997

Mar

t1 ,900
^
Rs.
1C II 1.2 1,000

ffi Rs.

\Mut"'\"^'^"^,,nt :f-- -
)0

\ -l:::-=711; r,,nd insuratrue I

-l c'"' ,;:;i;
\H*lilli'"":ii"'
I \ {" Ilooi
"<qoox=
\\2ror"""
\
I
' -1.1r4

I--*' ar I Bv Prut" - |
I

ejssr
kaq
2009..- Fi1t \?,"iffi; toss APP'\
Mar.3

\,'
\l:r:fl'lt";\-

-Mar.3
\To ::. 5,3Jis_
\1 \resewe^'

152
 Sinking fund :insurance policy account
RS. 1997 f(s.
1996
1,15,000 Mar.31 By Balance c/d 1 ,21,900
April 1 To Bank Account

1997

Mar.31 To sinking fund Account 6,900

(lttt.l

1,21,900 1,21 ,900

1998
1997
1,21,900 Mat:.31 By Balance c/d 2,51,114
April 1 To Balance b/d
April 1 To Bank Account 1,15,000

'1998

Mar.31 To sinking fund A,/c (lnt.) 14,214

2,51,114 2,51,114

1999
1998
2,51,114 Mar.31 By Balance c/c 3,88,081
April 1 To Balance b/d
April 1 To Bank Account 1 , 15,000

1999

Mar.31 To sinking fund , Account 21"967

(lnt.)
3,88,081 3,88,081

2000
1999
3,88,081 Mai.31 By bank Account 5,33,266
April 1 To Balance b/d

April 1 To Bank Accor.rnt 1,15,000

2000
Mar.31 To sinking fund account 30,185
(lnt.) :

5,33,266 5,33,266

,t 6?
 6% debenture account
Rs.
Rs. 1996
2000 5,00,000
April 1 6Elnt A".ornt
--l(.) 6--L
Ddl l^
A
^^^t rnt 5,00,000
Mar.31 ^vevv' ''
account
il** on redemption of debentures
RS.
Rs. 2000
2000 25,00(
25,000 Mar. By sinking fund rvc
Mar. 31 To Bank Accounl
31

OUESTIONS
are correcl :
1 . . Which of the following statements
owner of the company'
(a) A debenture-holder is an

(b) Debenture-holders gettheir

,n"*t o::l"t'].on.ihe liquidation " t:"::::
, even if there is loss to the com[
(c) Debenture-holders will be entitled to get interest
must be fully pa
fully paid whereas debenture stock
(d) Debenttire need not be
a premiur
and can be redeemed at
(e) Debentures can oe issued at a discount conve
premium on redemption of debentures
(f) Premium on debentures and
same meaning'
(e)l'
Ansr. [Conect : (c); (d);
statements are true or false
2. State whether the following
is trans
the balance in the sinking fund
(a) After the redemption of all debentures'
to general reserve'
acc(
investments is to credited to debentures
(b) Profit on sale of sinking fund
payable only when a company
makes profits'
(c) lnterest on debentures is

(d) lnterestonsinkingfundinvestmentiscreditedtoprofitandlossaccount.
of the balance sh
Own debentures account will appear on the assets side
(e)
of pr
are redeemed out of capital' entry for the transfer
(f) lf debentures books'
account is not passed in the
debenture redemption reserve
are p
those which are repaid before other debeniures
(S) First debentures are
transferable by mere deliver
(h) Registered debentures are those' which are

154
 (i) Acompany cannot buy its own debentures.
(j) In case of debentures if the quotation is cum-interest it means that it is with interest
and for recording purpose interest is added to the total price paid.

A.s. lrrue: (a); (e); (0; (s), Falser (b)i (c: (d);(h); (i); (i)].
'J. Whal do you understand by a debentrure ? Describe briefly the different lypes of
debentures.
4. What is debenture stock /
5. Dislinguish between : (i) a debenlure and a share, and (ii) debenture and debenture
stock.
6. Give diiferent considerations for which debentures may be issued.
7. Write notes on: (i) Debentures Discount, (ii) Debentures as Collateral Security, (iii)
Interest on Debentures, (iv) Ex-interest nad Cum-interest, (v) Own Debentures.
B. Discuss the various journal entries which are passed in the books of a company when
provision is made through sinking fund'or insurance policy for the redemption of
debentures.
9. What are the various methods oi redemption of debentures?
10. What are the alternatives available for making the provision for redeeming debentures?
ls it necessary to make such provision ?
11. Explain (i) redemption of debentures out of capital and (ii) redemption of debentures
out of profit.

PRACTICAL PROBLEMS

1 . A limited company issued 1,000 debenture bonds of rs.100 each at a premium of 10

per cent repayable at part at the end ofthe '1oth year. The debenture bonds were payable
25 per cent on application, 35 per cent on allotment (including the premium) and the
balance on first and final call. All the moneys were received by the company in due
course.

' You are asked to journalise the above transactions in the books of ,h" aotp"ny.
2. A limited company issued Rs.1,00,000 debentures, which were issued.as follows :

'1.
I To sundry persons for cash at 90 per cent I Rs. 50,000 nominal
Z. | rc acreditor for Rs.20,000 capital expenditure in I Rs. 25,000 nominat
satisfaction of his claim I

^t*I
J. lO OanKers as collaleral secunty 25,000 nominal

155
l- The issue (1) and (2) are redeemable at the bnd of 10
years at par' How shcr
ii" o"i"*rt;t be dealt with in preparing the balance sheet of the company ?

debentures

Ans.[DebentureDiscountA,/cwrittenoff:1994Rs'2,000;1995;1996rs'1'000;1997Rs50
on 1"' April' 1994 at a discou
4. A company issues Rs.1 ,00,000 1O per cent debentures each
drawings of Rs'25,000 on 31"1 March every ya
of 5 percent repayable in annual
year' The financial year oft
Calculate the amount of discount to be written off each
company ends on 31"r December each year'

5.(a)Alimitedco.issued2,000'10%debenturesofRsl00eachatRs'95on1'1'91-'
end of 5 yea
oer the terms of issue, debentures are to be redeemed ai the
bno* the amount of the discount to be writlen off to the profit and loss
accot

A company purchas.es assets of Rs 2,60'OO0 and liabilities of Rs'50'000

fot
(b)
sumofRs'2,00,000-Thepurchaseconsiderationissatisfiedbytheissueof{
: debentures of Rs'100 each at par' Journalize'
discount of
(a) A company issued 20,000 'l0o/o debentures of Rs'100 eacl'l at a
I

'' ,"p"y"Ot" 10 years at a premium of 57o' Pass necessary iournal enkies'

"fter
Ans.[(a)rs.2,000;(b)CapitalReserveRs.10,000;(c0LossonissueofdebenturesrS'2'00'0
par on l"tJanuary 1(
6. A company issued 5,000 debentures of Rs'100 e'ach at
established for.
redeemable at par on 31"r December 1999' a sinking fund was
purpose. lt was expected that investments would earn 5% net' Sinking fund
tar
years @ 5%. on 31$ Deceml
show that Re.0.1gog75 amount to Re.1 ai the end of 5
bqnk bala
1999 the investments realized Rs.3,90,000 On that date ihe company's
the necessary lour
stood at Rs.1 ,45,600. The debentures were duly redeemed' Give
to the neal
eniries, ledger accounts and assume that the investments were made
Rs.1O.

7.|ntheBa|ancesheetofacompany,thediscountondebenturesshowsadebitbala
of Rs.15,000. Every year Rs.5,000 is charged off to profit and loss account'
How
first year and sec
you show the discount on debentures account at the end of the
year in the balance sheet of the company ?

,1
6A
 Ans. [Dibcount on Debentures'account balance at the.end of: 1"r year Rs.10,000:
2^d year
rs.5'000 to be shown on the Assets side under the heading of Misce[aneous
expenditure (to the extent not written off)l

8. On l.rJanuary, 1994, a company made an issue of 5,000 b% debentures of

Rs.100
each at Rs.90 per debenture. The terms of issue provided for redemption
of Rs. 20.000
debentures every year commencing from 1gg5 either by purchase or by
drawing at part
or at the company's option. Rs.s,odo wa" writt";;;il i"t""]";1,iililffi;;
1ee4 and 1ses.-Duiing *re year 1ffi,;;-;";;;;;;;;*;;ffi#ili
debentures of the face varue of rs.6,000 at Rs.g4 per debenture and rs..r4,000
at Rs.g2
debenture. Pass journal entries.

9 A limited issues 10,000 14% debentures of rs.100 each at g8 on January

1, 1ggl.
Under the terms of issue (a) debenture interest is annuaHy payabre
on sr", b"""r0",
every year, and (b) one fifth of the debentures are annually redeemable
by drawings,
the first redemption occuning on 31"rDecember, 1gg3.

Ans. [Balance in debentures account on 31.12.g4Rs.6,00,000:

Balance in discount on issue
of debentures account on 31.12.94 Rs.6,000; interest on debentures:1992
ns.f ,+O,OOO,
1993 Rs.1,40,000; 1994 Rs.1;12,000; discounton issue of debentures
written ot, iggz
Rs.5,000; 1993 Rs.5,000; 1994 Rs.4,0001.

10. A comoany jssued Rs.2,00,000 oyo debentures of rs.1000 each

at par, repayable at the
end of 5 years at a premium of syo. rn terms of the trust deed,
a sinking fund was to be
created for the purpose of accumurating sufficient fund for the purpose.
rnvestments
were made yierding 5% interest received at the end of each year.
Afl investments,
' including reinvestments of interest received, were rlade at
the end of the year.
You are required to show for 5 years, the _
(a) Sinking Fund Account; and

(b) Sinking Fund lnvestment Account

Note. [Rs.2,71462 invested at the end of each year at per

s cent compound interest wirl
amount to Rs.15 at the end of 5 yearsl.
11. lhe debenture redemption fund account of a limited company stood at Rs.1,60,000
represented by rs.2,00,000 (nominal) investments. The debentures
stood at Rs.5,00,000
and the company sord Rs.24,000 investments at Rs.g5 for the purpose
of redeeming
Rs.20,000 debentures,at I 02.

Show ledger accounts ignoring interest etc.

Ans. [Profit on Sale of Investments Rs.1,2001.

157
 compa"l a debenture redemption

''' Ii,..
12. on 31d March, 1995,
s, oo, o
the:AlkaTrading
oo'"n'"'*'"i' [i iffi !11^.110

;WU:U1;; T;::""1n:"]tr"'""frJ
i;;,ffi :j.'rffi :";"eot;r$r$iilmter1ee5.rhes:TJ*tH',"TiJ:liT:H:
the proceeds wer€ banked
on
and
and realized 83% 'net ledser'
;;;;;;" transactiohs in companv's
Fr/c Rs 49'7001]'
Ans. [Balance in Bank as on 1"rJanuary'
rs'8'00'000 5% debentures :ut'"t1nl'"o
13. A company had was Rs'7'4
31", oe'iliio;;;;' on tnll-f3L^siniins rund price oI
redeemabre on put"l.1:O the average
debentures
represented OV nt'f 'OO'OOO "*n lnstattment was Rs
"' 28'400'
and Rs.6,60,000 tt"
"""*' ''"*'tinuat
were realized at Rs'98
and the debenturet
1995' investments
On 3151 December'
redeemed'
the year 1995'
You. are required to
write up the accounts for
Loss on Sale of 3% Stock Rs :
of own Debsntures Rs'1'O0O
Ans. [Profit on Cancellation to General Reserve Rs'7'99'0001
it"nsi"""o
Balance of Sinking
'"tJl"f

i
158
t

L
 corvlpnNY @ANctAL
STATEMENTS

OBJECTIVES
seehowthefina|A/cofacorporatehouseisprepareowe\^/|1,
ln this chaPter we will
proceed as fellows :
1. lntroduction
stalement
2. Objectives of financial
statement
a *""0 for regulation of financial
4. Parts of {inancial statement
5. Balance sheet of a company
6. ltems of balance sheet
7. Profit and loss FJc
8. ltems in Profit and loss fuc
9. Miscellaneous ExamPles
**::.:l::;ter p1"l:fy::',:1;:il:::[ ifJ::Til:';::l?[
' we w'r d scus' *."
,n" o.oi""il"'. ":"i:::?1",:,T;[TlT:^"::""'.':J1"uffi;;;. which cannot be
.omorise relevant data ano "t
in the financial statements'
Ot"t-""r*
OBJECTIVES OF FINANCIAL STATEMENTS
are as follows ;
of preparing the financial statemenls
The objectived credit
thai is useful in making rational'investment'
1 . To provide financial information
and similar decisions' business
predict cash flows io the
informatiQn to enable users to
2. To provide financial
-
' and subsequently to themselves to th'ese
on about business resources (assets)' claims
3' To provide financial informa and changes in these
resources and clalms'
an"o owners equity)
resources lriar'ities
OF FINANCIAL STATEEMNTS
NEED FOR REGULATION uo' oJ-olut'u
helpful to th"^lt,tJ:
if they are not drawn
are least
Financial statements
anddonotdisclo,".n"'.i"fr.n,"JJ"aintormation.sotnetottowing|egalframeworkmaybe
discussed :

4(q
 annual general meeting the followi
1 . The board of directors must present at every
year to show the financial position oi
2. A balance sheet at the end of the financial
company.
the performance of the business'
3. A profit and less lJc for that period to show

Section - 210
a calendar year but it should not exce€
A financlal year may De more or less than non
it may extend to '[8 months companies
months. With special permission from registrar year'
every
prepare their accounts for the financial year ending with 31"tMarch

Section - 209
are prepared wiih the help of t
The profit and loss account and the balance sheet
books are required to be kept on at
of account maintained kept by the company' Such
accounting'
basis and according to the double entry system of
Part_lofschedu|eV|ofcompaniesActlg56saythateveryba|anceshee
and
company. must give a true and fair view of the
state of affairs of the company
conforrntoeitherthehorizonta|orvertica|form.
every profit and loss.ac
Part - ll of schedule vl of companies Act 1956 says that yt
of the company for the financial
must give a true and. fair view of the profit and loss
with accounting standards'
Financial statemenfmust be prepared in accordance
accountants of India (lcAl) al
standards are prepared by the inititute of chartered
prescribed by the central government'
O"
Every balance sheet and piofit and loss Flc of a company.must "::1"1[:
one of whom must be mal
its manlgei or secretary and by not less than two directors
director.
the report of the
The financial statements must be accompanied by :t"YloY
and'other companies (auditofs
to the shareholders as required by the manufacturing
order (MAOCAR) 1988 issued by the central governmenl'
general meeting n
Every balance sheet laid by the company at the annual
auditor's repl
u."otp"ni"o'uy a report of the board of directors as per sec' 217 and
give a true i
. As pert he companles Act 1956 the financial statements should
view of the books of accounts maintained
MEANING OF TRUE AND FAIR VIEW
prescribed by the Act' T
True and fair does not mean conforming to the forms
prepared in a defined mannel
fair view cannot be obtained only if the accounts are
with the generally at
down by various accountrng st,andards and in conforming
accounting PrinciPles (GAAP).

160
 is defined by any accounttng
not been defined in law nor
The term true and fairview has "true and fair
in" n"u*'"' statemenis reflect a
'" ;;;;;'t"i
standard' However it n1"y
are mel:
viewl' if the following requirements
I and ll
with the requirements of parts
(a) The statements are drawn in accordance
of schedule Vl of the companies
Act'
by
on double entry principles followed
(b) Proper books of accounts are maintained
accrual basis of accountlng'
the requirements of accountlng
(c) Accounts are drawn conforming to GMP and
. standards'
of transactions and events
that took place
substance
(d) Financial statements reflect
during the Year'
by the statutory buditor although
(e) Accounts disclose all information as required by low'
required
some infor:mation may not be strictly

ACCRUAL BASIS
their accounts
under the companies Act for all comp)anies to rnaintain
. lt is mandatory ot accounting' Accrual basis as
entry
on accrual basis and "t""'Oi-ng-i;l"uble fYfem
o,.*n"nn"O fr"t nu''g"'"ffi iui t"u"n'"" inttu nttioo
*tf'
are recognl: fil:tt"r1i;t;::?;?ilT:
ar" n"ot ,"""iu"0 in cash' Similarly expenses have not been paid'
if such expenses
process of generattng
"u"nu"t "u"n
PARTS OF FINANCIAL STATEMENT
must consist of
The financial statement of company
(i) Balance sheet
(ii) Profit and loss'fuc
(iii) Cash flow statement

(iv) A report on corporate governance

(v) Management discussion and analysis

and proflt and loss FJc of a
in the present chapter we will discuss how the balance sheet
But
comPanY is PrePared'

BALANCE.SHEET

MEANING
to
of Assets' and capital which is prepared
Balance sheet is a statement
"oi-a ":!:l',tl:"date i'e'' at the end of the year'
know ihe financial po'ition ffi*von u particular

161
 house mustte pl"Jg"gii,T,:
Balance sheet of a corporate ii:;"$:: l"J[;
p",1.,;:; ;i;, il1iini::
'bankins, insurance, "J.li:^:", ff ';ili ::,]i"il il ; ;; " p tut,
u"i"r'tu
1"9 :i::*;ir;ec ilescriued
vrv' '-v therein.
dr -
the formats for financial stalemerrrY
P'

l"lorizontat Balance sheei

OF M/S-"- as on 31"t Marcn
--

(i) Paients, traoe

and designs

O liveslock,
etc.

1- Investment in Go$' of
trust securities
2. lnvestment in sharesr-
debentures or bonds'

E,rt*"t assets' -loans

and advances
(A) Currer,t Assets

162
1. Capital Reserves
2. Capital r€demption
reserve
3. Share premium AJc
4. Proflt & Loss (cr)
5. Sinking fund.

163
il6ltintingunt liabilities
ul*r,"o' io*M 9F EfLA\clsHlET

164
DETAILS tN THE BALANCE SHEET ITEMS

Share caoital
(i) Details of authorized, issued, subscribed and, called-up capital ,riust be given separately
with respect to preterence and equity shares, the two'types oi shares, companies are
permitted to issue.

(ii) From the called-up capital 'call in arrears'must be deducted to arrive at paid-up capital
calls in arrears must be separately shown for directors and others.
(iii) Forfeited shares balance, if any, after transferring profit on reissue to capital reserye,
should be added to paid-up capital.

(iv) shares allotted for consideration other than cash such as shares allotted to vpndor
companies in mergers end acquisitions in pursuance of takeover agreements must be
. disclosed by way of information under.this head.
(v) Similarly particulars of bonus shares issued musl be given. Sources from which bonus
shares are issued e.9., eapitalization of profits or reserves or from share premium
account, must also be stated,

165
 along wr
conversion o{ preference shares
(vi) Terms and conditions-of redemption/ any option
redemption i' must be given particulars of
earlibst date of
"J""""'"^
issued share capital must be specified'
part of share t
a public issue is made' any money recetved will becorne
(vir) Whell and c;
fneretore shaie appiication moneys
only after the albtmenl is maOe moneys re{
be shown separately However'. excess applicaiion
advance must wilhin a sFort f
musl bq shown
tiuuilitils as these have lo''be repaid
'no"' "u""ni
Reserves and surPlus
reters
the items resewes and surplus Surplus
(i) Under this heading are shopn for appropriations s
balance in tn" p'o* unO loss accounts a{ter providing
credit are of twc
the company may decide. Reserves
dividends and anv *ro"-otrl *nirn approl
Capital reservqs are built up by
namely capital and revenue reseNes' of f(
u' p'ot's bn sale of investments' assets on
reissue
capital profits appropriating n
etc. on
"u"n
tne otne'lrtano revenue reserves are built up by
shares
reteiPts or Profits
reserves and surplus since the
last t
from any
(ii) All additions and deductions
of the specified heads'
sheet must be shown under each

(iii) A reserve is to be distinguished from reserve fund'

would be shown as surplus ur
(iv) lf the profit and loss account is a credit balance it the same should be deduct
a debit balance
heading on the other n"nO' if it is
the reserves.
in the
premium account all. details of utilization
(v) ln the case of the item share
Act must be shown in the year of util
orovided under sec-78 ol the companies
per c.EDt
-^- SEBI .guidelines must be shQV
(vi) Debenture redemption reserve created.as
head specific revenue reserve'
liabilities side of the B/S under the

SECURED LOANS
is one u
loan.are shown Afully secured loan
(i) Under this heading fully secured f the
than the amount of loan' lf the value
market value of tne security is more pal
loan becomes partly secured Unsecured
is less them the lo"n urno'nt' th"
heading unsecured loans'
loan has to be shown under the next
included under the appropriate item
u
(ii) Interest accrued on loans should be
debentures and similarly for other iten
head. lf it relates to oebentures under
(iii) or managers' details must be dis
lf the loans are guaranteed by the directors
'-' loun" are from directors it should be shown
separately'

166

L
t
 case is to be specified'
(iv) Nature o{ secufity in each
date of redemption to be
or conversion of debentures and earl'iest
(" ) i erms of redemption
stated such
had guaranteed the loan'
mort!;aged in favour of a third partyrvho
{vit lf the assets are
t""u'ua loan' The of mortgaging lhe assets ln
loan should atso ne claJsltieal' 'fact
stated'
of the lender should be
favour of guarantor instead
should be shown under
payable under hire-purchase agreements
(vii) Future installments
item'
secured loans as a separate
not a secured loan as no
asset has been
by government is
{viii) Debenlures guaranteed
a loan'
mortgaged aEainst such
issue pending should h,
allotment ^!-^,,r.r be
received against a debenture
(ix) Application moneys
shown as short-term deposits'

UNSECURED LOANS
provided for' In the *:"
o l:::'T[ j::ti[ffi
hich no security has been
;i##r;iyi'::::]:J:"'J:i[""
"f '311y
:"'T:'J il i'il::
appear under this headins
rhere are. t:"'fT::T:
(20 loans and advances' (3) short-term loa ;;';*;;;".
and (40 other
deposits
loans and advances
payment within one year
are those which are due for
uo":"::".1""-:,;i],
(ii) Short-term loans ano advances
-"i"-" ,t" .hown under current liabilities'
items a
Normally such
from the date ot balance sheet

CURRENT LIABILITIES
liability includes loansi deposits' ?":y:fl:t*:::l
li) As per rcAr su deilness current T:llYj:"1:::"i:i;:..::il:'fi
":::l
falls due for pavmenr In a relativelv
[:ffi::?l";:l'
i'ff
short period' not rn^orejt-::i:"j;;;
;"0 unsecut
secured and
of thu e"t iequires showing of short-ierm ".t".'*O
schedure_vr
"ompanie" *it' current liabilities' Further interest
loans under *" "oo'J;l;;;;J;;;;;i loans are also not snown
and d"" *ithl;;;;;t to s""u'eo an^o unsecured
accrued
under the respective heads'
. under current liabilities buishown
accepted bythe enterprise
for seven items' Acceptances'are bills
nil This heading prbvides
;;;;;uiun"" The items sundry creditor
include all
and pending o"r'*"i 'i'"ttt"te' and any olher current
o,li.r'in"ullJing activitie-s_ of the company
to tiabilities
"r,r,nn (6) 'other liabilities' (if any)'
liabilities fall under items
to a subsidiary for purchase
company' is to be used to reveal liabilities
$) The item 'subsidiary
of goods and services etc'
against which goods are
include any payment received in advance
3) Advance payments

167
 should be Provided and mentioned

(i), claims against the company not acknowledged as debts

(ii) uncalled liability on shares partly paid'
(iii) Arrears of fixed cumulative dividend'
capital acc
(iv) Estimated amount of contracts repaining to be executed on
provided for; and
liable'
(v) Other money for which the compaqy is contingently
guarantees given by the
, Under this heading is to be shown {r9 amoun]-oi 1ny
officers of the company'
9n behalf of dkectors or other

168
Generally the contingent liabilities are showri at the foot note of lhe balance sheet.

FIXEO ASSETS

(1) As per As - 10 'Accounting for Fixed Assets' a fixed asset is an "asset held with the
intention of being used for the purpose of producing or providing goods or services and
is not held for sale in the normal course of business. Even assets which are not legally
owned but are held for the production of goods or services for example leasehold
premises or asset purchased under hire-purchase agreements are also shown under
this heading.
(2) under this heading there are eleven categories starting with good will and ending'with
vehicles etc. under each head the original cost, and additions thereto and deduitions
there from during the year and the total depreciation written off or provided to the end of
, the year are to be stated. lt would be clumsy to show all the details in the balance sheet
itself and therefore a separate schedule will provide such details.

(3) In ascertaining the cost of an asset all expenditure incurred in bringing it to present
location and put it to working condition should be included.
(4) In every case where the original cost of the asset cannot be ascertained without
unreasonable expense or delby, the valuation shown by the books can be given. For
thls purpose, such valuation shall be the net amount at which an asset stood in the
company's books at the commencement of this Act after deduction of the amounts
previously provided or written otr by way of depreciation, and where such an asset is
sold, the amount of sale proceeds shall be shown as a deduction.

INVESTMENTS

(1 ) As - 1 3 defines investments as assets held by an enterprise for earning income by way

of dividends, interests, and rentals for capital appreciation, or for other benefits to the
rnvesting enterprise. Investments represents capital inv'ested outside by on enterprise
' and they may be long term or cunent investments current investments by its nature are
readily realizable and are intended to be held for not more than one year. lnvestments
other than current are considered to be long{erm.
(2) schedule Vl of companies Acl requires investments to be shown under the following
categories :

(i) Government or trust securities

(ii) Shares, debentures or bonds

(iii) lmmovableproperties
(iv) Capital of partnership firms

toY
 shot{
held in subsidiary company must be separately
bonds
(3) Shares, debentures and
and the mode of valuation'
the nature of investment
(4) Company should disclose and unquoted and mari
must be subdivided into quoted
(5) two categories
\'r/ The first quotua gtven'
uuf"u" of investments must be
be given'
of fully-paid and partly-paid must
etc' details
(6) In the case of shares
investments and otn
separately t]i:t]lT:
trade
(7\
\f 'r A statement of investments to the balance sheet'
il*",*""t should be annexed names o:
partnership firms'lhe names of the firms' the
(B) ;" ;" case of investments in tf,"'"" of each partner must
be given'
the partners tt"'otu'
"uJiui'110''-i"
and Advances :
Current Assets and Loans To:
Assett: Loans and Advances'
to (A) current
(1) This is a common heading
t
?111t)
and 5 under loans and
#il'l;;i;ssets
advances'
there are 12 items'

(2)cash,andothera::"^:.:fl
productionof
fl il:r:f il:1";::::[T::f,::'"HJ.".,:::::::i;
gooc::_T;;t;usuaily and net realrz
valued at lower of cost
as cuffent Assets curr(
value'
the followiqg details must
be shown ' :
sundry debtors
(3) With respect to
six months and other d
for a period of more than
(i) Showing debts outstanding
recoverability
(ii) Classificaiion based on security and ' - -,
is fully secr
good in respect of which the company
(a) Debtors considered
holds no security othet
good for which the coppany
(b) Debts considered
the debtor Personal securitY'
or bad'
(c) Debts considered doubtful
debts from the sundry
d€

(iii) u is requireo to deduct

provisio" qi:d ry::::tful
tt'u'
rp'ouiti on t"nliio'noi' "x"""0
n" ?:: ::1;: : : J:l
::::r:1,:;::J::
provision already created should be sn<
surplus
and surplus'
debts under the head reserves
with scheduled banks' ant
primarily classified into'balances
(4) Bank balances are
bankswith'""puttto'u'l#""'*'tnt'n"ou*o:^?l[',u1"j;i',::nilit;}"tt'fi
should be gtven"wt
]

o"posit accounts
""0 oe siven' lf the directors
"l"",no
of the banks "i "*"'"t"
"n*n"li'in ""i""
t* "*-tti"o'led banks where in bank balanc
1tr'1yro
relatives r'tuu"
'n*i"I''in

170
 maintainedthesameshou|dbedisc|osed.|ftheba|anceisaoverdraftthesameshou|d
by way of a note that sundry
be rncluded uncler sundry creditors alongwith a disclosure
creditors include bank overdraft amounting to Rs

(.r :-oans and advances are classified as :

'
(A Advances and loans to subsidiaries

18)Advancesandloanstopartnershipfirmsinwhichthecompanyoritssubsidiaryis
a partner.

i{:} Bills of Exchange

iD i Advances recoverable in cash or kind or for value to be recovereo'

(E) Balance with customers' Port trusts etc (where payable on demand)'

DisclosurerequirementsofloansandadvancesaresimilartothatofSundrydebtors.

Miscetlaneous ExPenditure
under this
(1 ) The amount are shown to the extent not written off or adjusted The first item
head is preliminary e*penr"s. ihese are also known as formation expenses
andjnclude
tega|costsindraflingthememorandumndArtic|es,capitaldutyandotherfeeson
|."!i.tr"tion, cost of printing memorandum, articles and the statutory books of the
These
company and any other expenses associated with the formation of the company'
arenorma||ywrittenoffagainstprofitsoveraperiodoftime.Unti|itisfu||ywrittenoff,
the amount not written off appears under this head'

(2) Expenses associated with the issue of shares and debentures such as issue expenses,
brokerage paid to brokers, under writing commission paid to under-writefs appears
underthishead.Thesecana|sobecapita|izedinstead'ofshowingasmisce||aneous
expenditure when share and debentures are issued at discount, the liability on account
of share capital and debentures will appear at par value. However cash received
will be
short of such liability and the difference being discount appears under this heading.
Financial prudence requires such amount to be written ofover a period'

(3)|nterestpaidoutofcspita|duringconstructioncaneitherbecapita|izedorshownas
miscelldneous expenditure. Most of the items coming under miscellaneous expenditure
deferred revenue expenses which must be written off over the period for which benefit
is available. For example debenture discount and issue expenses can be written of
over the maximum period for which the debenlures would be outstanding' The fact
thal'

lhe amount spent is large does not make expenditure a defened revenue expenditure.
Such exDenditure thould benefit future period.

171
 PROFIT AND LOSS ACCOUNT
companies Act 1956 every profit and
loss accoun
According to sec-211 of the
prof:' or net loss of the companj4
.i"rfO give a 'true and fair' view of the net
""*p""V A/c
Requirements as to protit and loss
so that it can clearly disclose the result
The profit and loss AJc shall be made shall disclose
the period covered by the account; and
working of ihe company during of non-re(
or receipts and debits or expenses in respect
materiar feature, including credi-ts
an exceptional nature'
transactions or transactions of
the various items relating to the incon
The profit and loss accourlt shall set.out in par
under the most convenient heads' and
expenditure of the company arranged
in respect of the period covered by the
accou
shal discros.e ihe foflowing informa]tion
are affected by the cot
(a) The turnover that is the aggregate amount for which sales
(b) C6mmission paid to selling'agents
than the usual trade discount'
(c) Brokerage and discount on sales' other
:-
A- In the case of manufacturing companies
giving item-wise break-up and indica
(1) The value of the raw materials consumed'
quantities thereof'
produced' giving break up in respect
(2) The opening and closing stocks of goods
ot goJOt and indicating the quantities thereof'
"iuu"
B-lncaseoftradingcompahies,thepurchasesmadeandtheopeningandcloslng
company and In
goods traded in by the
giving break up in respecl of each class of
ihe quanties ihereof.
gross income
I c- In the case of companies rendering or supplying services the
' from services rendered or supplied'

D- works in progress, the amounts for which st

- In the case of al concerns having and atthe end ofthe accountln(
nuu" been completed atthe commencement
or diminution in value of fixet
(1) The amount provided for depreciation' renewals
fact that no provision has been mi
lf no provision is made for depreciation' the
computed in accordance
ou ,t"ted and the quantum oi arrears of depreciation
of a note'
-205(2) of the Act shall be disclosed by way
other fixed loans if
(2) The amount of interest on the company's debentures ancl
manager' if any'
or payable to the managing director and the

ITL
 paid or
and other lndian taxation on profits
(3) The amount of charge for lndian income-tax

(7) (a) Dividends from subsidiary company

(b) Provision for losses of subsidiary company'
and staiing whether such
(s) The aggregate amount of the dividends paid' and proposed'
..,u.ouii,aiesubjecttodeductionof.incometaxornot'

E.Theprofitand|ossaccountsha|Icontainthefo||owingpaymentsprovidedormade
directors or manger' if any
including managing
during the financial year to the directors
other person;
iv'tnJ the subsidiaries of the company and any
(i)
"otpunv,
Managerialremuneratlo
' n under sec 198 of the Act
- paid or payable during the financiar

year to the directors if anY:

(ii) or in kind
Any other perquisites or benefits in cash
(iii) Pensions, gratuities etc'
the
pJc shall contain or give by way of a note a statement showing
The profit and loss
computations of net pronts in-acloiJance wi
i sec-349 of the Act. With relevant details of.the
profits to the directors
payable by way of percentage of such
.' calculation of the commissions
;;;fu;"""ging directors, or manager (if bny);
give by way of a note detailed information
The profit and loss F/c shall further contain or
or otherwise'for services
in r."gurJio paio to irre auditor' whether as fees' expenses
rendered
"tounts

'F) As auditor
ib) As adviger, or in any other capacity' in respect of-
i. Taxation matters
ii. ComPanY law matters

iii. Managoment services; and

ic) ln any other manner'

loss account shall also contain' by
.:rthe case of mairufacturing companies, the profit and
'*ay of a note in respect each class of goods manufactured.

173
 PROFITAND LOSSACCOUNT
FOR THE YEAR ENDED- 31ST MARCH 2OO5

I
 -
Notes to the profits and loss account :

r1)Profitandlossaccountschedulesarenumberedaftertheschedulesorba|ancesheet'
ar)d the(cfore start with higher numbers'
work-in-progress and finished stocKs
(2) ln some annual reports adiustments relating to
are carrrecl to malerials cnnsumed'
such as manufacturing
(3) Under other expenses there can be more classificationsexpenses etc'
distribution
expenses, administration expenses, selling and
showing such details'
(4) Each schedule gives more details as the income statement avoids
product and/ or territory'
For example sales may give details of sales by
or
(5) The schedule of other income will show such items as pro{its on sale of fixed assets
investments and such other items'
prior period items from part of current
{6) It may be noted that both extraordinary iiems and understand the impact of
profits but they are snown separately so that the users can
such items on current Profit'
has a choice in accounting
.7)
!
''' ln the preparation of profit and loss account each enterprise
valuation
p"',"'J. *irn t""pect to revenue recognition' inventory valuation' depreciation'
oi investrnents etc.
profit will be mentioned
3i The change in any acccunting policy and its impact on current
income statement'
only in the notes lo accounts and will not be shown in the

SOME ADJUSTMENTS
- Calls in arrear : This item generally appears in the trial balance
lt represents the amount

not paid by the snarenold;rs in the calls made on them by

the company This is shown
from the called-up
in the balance sheet on the liability side by deducting the amount
amount,|fthisitemappearsintheadjustmentthenthetrialba|anceshowspa|d-up
paid-up capital to make the
capital (not-called-up capitalo. The amount is first added to
paid up capital as called-up capital and then deducted again'
balance This
: inclaimed dividend : This always appears on the credit side of trial
on the liability side of
dividend not collectedby the shareholders' lt is shown
=presentg
::e balance sheet under the heading currenl liabilities'
it represents dividend
:::erim dividend : This item always appears in the trial balance and
Annual General Meeting and mostly based on half
='c by the company before the the debit side of
r-;{y Aqcounts. This is an appropriation of profit and is shown on section of the profit
bection of profit and loss account The appropriation
=crcpriation
-. .css account is usually called profit and loss appropriation AJc

.1 -7
lr\-,E
 the debit side I

ihe trial balance : This item is shown in

(4) Final dividend appearing.in
appropriation account'
"l il;,;il"ss
,"iy:n::nt*:"J,'""J,ff Jffl,'ff i13[$::f iff :ffi J::'i"#:i'T"Tii
:]
,.,ffiffi ilru#:tru,',il",,:iyf ":;:li:'":'*'1tr[Jlii;ffl:ffi
provisions'
Iileet uno"i tne heading

'':;;mr:"':::.,*;x;;,i,#::i['::fr ""fl ;;':i'tryfr ]ifii

S':li'JtGl'::'ff 1l3;li'"-f ;i:l::',".:'::'iil"'li:11
:l:";lffibalance an(
of the triat

''';"";""i::r::::'::::",HlT",l'""J""+U::11$trff[ifri:''Jffi
interest ue'*:
o;.r
t,"Hil
f, t,, u""ou n,.
d

round outand shown

"- :::".1 llX $i;;

:.ilHl iT"Jiililtrifi:;:'J:l::ri:1#:"J'1i["J
"' ffi"lJ"g*i"t"lljneousexpenditure'
iff: J;'ff
;

I fifi *ffi :'rxi #;ift [*tli[*$t#;i,il

:l".l#ii :::^:: " 3'
'j"iffi :: ff J:,i:i::::'
Bank Ai/c
Fi/c
To income tbx nlVable

n',
:fi:::l;ilj;:""T ;: i','"x
"J q[ili::#Jtr#{;: ffi*,".'ffi
sn"utunoer'n"niio#'Il'"'llll!ilfJ:-""1'ff
lr:;:L':*:,Hl;
#'iTy'::fl",::''+"#y;::X''f :,"*::l.t;';o",,","sheerunder,he
and the b
account
"miscellaneous expenditure"'

176
 credit side oftlia| ba|ance and is shown
(12) Forfeited shares account:This appears on the
by adding to the paid up capital under the
on the liability side of the U"f'n"" tn"U
heading subscribed caPital'

(il3)Securitiespremiumaccount:Thisisshowninthe|iabi|itiessideoftheba|ancesheet
under the heading reserves and surplus
following
taxaiion' a studerIt will come across the
(14) Tax adjustments : In'relation to corporate
rlems :

(e) Tax deducted al source

(b) Advance Payment of tax
(c) Income tax (corporate tax)
(d) . Provision for taxation

(e) Deferred tax.

discussed !elOw:-
The accounting treatment of the above points are .

of the inco rrie Tax Act' 1961 tax is to be '

(a) Tax deducted at sourie : As per section 194 '
they are paid' For example'.1{,tne^
.deducted at source from intere"t on securities before
;.*;Ililil'n..r6oo tn.t the companv will pav onlv rs'790 after dedu:-:19]i::
company on the recetpt or
Iour"e at 21%. The following entry is made by the. investor
this amount :
Dr 790
Bank FJc

Tax deducted at source Dr 210

To interestA/c tt-'-:.---^
-
.,
on thb debit side of the trial balance'
So the item 'Tax deducted at source'will appear
income tax payable after ihe
The amount sg deducted can later be adjusted towards
assessment is gver,
p) tax Act assesses are liable to
Advance payment of tax : UndEr sec - 207 of the Income
and the limit is Rs'2500 for
pay advance iax when tnu intot" exceeds a certain limit
made ;
companies. When the tax is so paid the following entry ls
Advance Payment of tax Nc Dr

To bank AJc

balance and is in the nature of a

This amount alsg appears on the debit side of a trial
income-tad payable
prepaid item' Advance payment oftax can alter be adjusted towards
after the assessrlent is over.

177
 to income tax accounl
on the assessed income is debited
(c) lncome tax : Tax
11l1o,l"r"o" ,", the income tax p"io in'ulu"n"" and tax deducted
a
arread'
income is Rs 100000 and it has
xr":.'":ffi*il:il;- ffui.;; ""'"""0
now pays Rs.40000 only
ilioln uouunr" Rs.6O,0o0 the company

The entry will be :

lncome tax account

Dr 100000
' 60000
To advance Payment of tal
40000
To Bank
tax deducted
both advance payment of tiax and
I

lf the assessment is not completed the headir

source remain unuOi'"t"d u'iO
*ould appear in the balance sheet under
etc'
current Assets, loan and advances
to gel
take quite some time for the company
r

: Since it would
(d) Provision for taxation
on profits at cune
assessed, it is usualto provide some amount for'income-tax
income bnd credited
rats oftaxation. S'"n p'o"i'ion
i"debited to the proJit and loss account
the he
orovision for o*"oon *hi.h upp"u" on the bal6nce sheet under'
"""or-ni
current liabilities and provisions'
been made
current year' provision would have
Just as provision is made in the ln :
"old.provision which would appear in
I
prouision is called as
previous year and sucn paid must
such a provision exists income-tax
trial balance on the creOit side' When
lt the old provis
and not to the profit and loss account'
debited to the p'rovision account
isinexcessottneincometaxpaid'suchsurplusprovisionshouldbeshownon' not sufficie
acbount. Likewise if the ord provision
credit side of the profit ,"0. i"r.
loss account'-These adjustments ,l|."
further debit is made to the profrt and -t*
due to these items'
*"W*ia line so thatthe cunent profits may not be affected
lllustration - 1

Fromthefol|owingtria|balanceandthead'iustmentgiventhereundershowhow
items would figure in the relevant accoun6'

Debit Amount Rs. Credit amount Rs.

Particulars
Income-tax (98-99) 60000
.: 68000
Provision for Taxation (98-99)

178
 for the vear leee-2000'
80'oo0 bv wav of provision for ta:1ion
il:::", - r'"vide Rs'
(98'99) Cr
n" Provision for Taxation
Particulars
r'
Arnounl
I Amount
Particulars I
68000
r. r""rrre.t; (r&") - 60000 By bal b/d
I .....'---'--.:
:- 8000
L To orofit & loss A'fc
68000
i
68000
I
Cr
Pr*isGn t- t"xation (1999-2000)

or the year ended 315t wlarch' 2000

Rs,
Rs.
8,000
80,000

March; 2000
Balance shqet as on 3{st
Rs. Aists Rs.

80,000

Itlustration - 2
tl:
A' tt"t M"'"h 1?98 uho*t
Tha trial belance of complex tax.
't Debit (Rs.) Credit (Rs.)
ItarYrc

@x the year ended 31-3-1997

2,20,000
1,20,000
t Provision for taxation for
l"-"--,:=,,,:,:

179
 The following further information is given :

(i) Advance payment of income tax includes Rs. 1,40,000 for 1996-97.
(ii) Actual tax liabiliV for 1996-97 amounts to Rs.1,52,000. No effect for ti'
far been given in the accounts.
(iii) . Provisions for income-tax has to be made for 1997-98 for Rs.1,60,000.
Y9u qre required to pass the necessary journal entries and show lhe relevant accounts. A
show how these items will appear in the profit and loss account and balance sheet for 1

vorr l aAR

(C.A.lnter, Nov., 19

Solution
Journal. '

Date Particulars . Debit Credi!

Rupees Rupees
2.t 2 0a Income-tax account Dr.

To advance payment of income-tax 140000

12000

31.3.98 Provision for taxation (96-97) Nc D!". 1,20,000

Profit and loss approprialion A,/c Dr. 32,000
To income-tax account
(Being the tax for 96-97 adjusted against the
provision for 96-97 and tax in excess of provision
debited to profit and loss account below the line.) ,

2l ?oa Profit ahd loss account Dr.

To provision for taxation account (97-98) 1,00,00

lllustration - 6

The following are the batances of Johri A. Ltd. as on 31d March, 2b01:

180

T
 Credit Amount ,, Debit Amo.unt
Share capital 40,00,000 Premises 30,72,000
12% debentures 30,00,000 Plant 33r00,000
Profit and loss account 2,62,500 Stock 7;50,000
Bills Payable 3,70,000 Debtors 8,70,000
Creditors 4,00,000 Goodwill 2,50,000
Sales 41,50,000 Cash and Bank 4,06,500
Genefal reserve 2,50,000 Calls-in-Anear 75,000
Interim Dividend paid 3,92,500
Bad Debt. Provision on 35,000 Purchases 18,50,000
11 4 20nnl

Preliminary expenses 50,000

Wages 9,79,800
Gen. Exp. 68,350
Salaries 2,02,250
Bad debts 21,100
1,80,000
1,24,67,5000 1,24,67,500
Additional Information :

(a) Depreciate ptant by .15%

(b) Write off Rs;5,000 from preliminary expenses.
(c) Haff year's debenture interest due.
(d) Create 5% provision on debtors for doubtful debts.
(e) Provide.for income tax @ 50yq
(0 Stock on 31"imarch 2OOl wag Rs,9,50,000
(g) A claim of Rs.25,000 for werkmen's compensation
is being disputed by the company.
{h) lgnqre corporate dividend tax.
ftedare Final Accounts of the Company.

181
 ended 31d March' 2001
Profit and loss account for the year
Dr.

Particulars Affi"t] Particulars Amount

By sales 41,50,000
To Stock 7,50,000
18,50,000 By stocK 9,50,000
To Purchases
9,79,800
To Wages .--'-'
To Gross Profit c/d 15,20,200
51,00,000
51,00,000

I 5,000 By gross Profit b/d 15,20

To Preliminary expenses I

68,350

2,02,250
To salaries
(1,80,000 + 3,60,000
-To debenture interest
1,80,000)
To bad debts 21,100
I
I

I To provision for doubtful debts

8,500
I

I To deoreciation on Plant
4,95,000
1,80,000
I To provision for tax

fio orofit and loss appropriation A/c 1,80,000

15,21
15,20,200

Profit and loss appropriatlon account

Cr.
Dr.
Amount Particulars Amout
Particulars
3,92,500 By balance b/d
' 2,62
To interim dividend
By profit & loss A/c 1,80
To. balance c/d
(Net Profit)
4,41
4,42,500

182
Balanco shset as at 31'3-2001
Amount Assets Amount
Liabilities
Share capital Fixed Assets

40,00,000 Goodwill 2,50,000

Called -up capital
75,000 39,25,000 Premises 30,72,000
Less: calls-in-arrears
Plant (33,00,000 :- 28,05,000
4,95,000)

General reserve 2,50,000 Cunent Assets loans

and advances

Profit & loss A'/c 50,000 Current assets :

Secured loan : Stock 9,50,000

12% debentures 30,00,000 Debtors (8,70,000 =

43,500)

O/S interest 1,80,000 31,80,000 8,26,500

Current liabitities and Cash & Bank 4,06,500

provisions :

Cunent llabilities : Miscellaneous

Expendiiure:

Creditors 4,00,000 Preliminary expenses 45;000

B/P 3,70,000

Provision :

Provision for Tax 1,80,000

83,55;000 83,5s,000

Note : There is a contingent liabilW of Rs.25,000 for workmen's compensation'

.lllustration - 7

The auto partg manufaQturing co-ltd. was registered with an authorized capital of
Rs.10,00,000 divided into qhareg of Rs.lo each of which 40,000 shares had been issued
and tully paid.
The fotlowing is the Trigl Bqlance extracted on 31'r March, 2001 :

183
 Particulars Debit Credlt
Stock (1st April, 2O0O) 1,86,420
Purchase and sales 7,18,210 11 ,69,90(
Returns i '12,680 9,85(
Manufacturing wages 1,09,740

Sundry manufacturing expenses 19,240

Carriage inwards _ 4,910
18% Bank loan (Secured) 50,00(
Interest on Bank Loan 4,500
Office Salaries and expenses 17,870
Auditors' fees' 8,600
Director's remuneration 26;25Q

Preliminary expenses 6,000

Free-hold premises 1,64,210
Plant and machinery 1,28,400
Furniture 5,000
Loose Tools 12,500
Debtors and Creditois 1,05,400 62,22(
Cash in hand 19,530
Cash at Bank 96,860
Advance payment of tax 84.290
Profit and loss AJc on 1"r April, 2000 38,64C

Share capital 4,00,000

17,30,610 17,30,6'1C

You are required to prepare Trading and Profit and Loss Acqoqnt for the year endr
March, 2001 and a Balance sheet as at that date after taking into consideration the fol
adjustments :
(i) On 31"'March, 2001, outstanding Manufacturing Wages and outstanding Office S
stood at rs.1,890 and Rs.1,200 respectively. On the same date, stock waS val
Rs.1,24,840 and loose tools at Rs.10.000.

184
 (ii) Provide for interest on Bank
Loan for 6 months.
(iii) Depreciation on plant and
machinery is to be provided
it is to be @ 1s% while on office Furniture
@ 10%
(iv)Write off one-third of balance
of preliminary expenses.
(v) Make a provision for.income-tax
@ 50%.
(vi)The directors recommendeda:?iden
(first) dividend
March, 2001 after statutory transfer @ 15% for the year ending 31"r
to generar ,""ur"_:Ar.rru 10%
dividend-Tax

Trading and profit and loss account

I o opening stock Cr.

1,86,420 By saleb
--I o purchases 7,1g,210
11,69,900
-:_.---.-.--.-.---_- Less : return
12,680
.Less:Returns
---:*-_--- ,f50. 7,0B,360
o manuacturino \y'/a.rcc 1157220
I I no 7.,r n
:AL.,u. Accrued rJy ctosing stock 124840
wages 1,ggo 1,11,630
| (] rnanutactunng expenses
19,240
I o carrrage inwards
4,910'
I o Uross profit c/d
--- 2,51,500

__=._------
- o Inrerest (4,500+4.500) 12,82,060
12,82,060
r
9,000 By gross profit b/d
r--o once expenses (17,g7O+1,200) 2,51,500
19,070
| \., duu||' tees
8,600
-'.___-_------.
o otrectors' remuneration
.r --
26,250
=-_:.:--
I u prellmlnary expenses
2,000
r o oepreciation plant
__
-Urntture 19,260
F
-
Loose Tools
500

-_-
2,500
I o provision for income-tax
82,160
I u d( loss appropriation
f:orll L/c (Net B?,160
profit)
2,51,500
- 2,51;500

-
185

-
 A/c
APProPriation
Profit and Loss
Amount
38,640

82,160

1,20,80c

sheet as at 31'03'2001
"l-"" L64,114
1 ,09,14:

10,00!
1,24,84:
1.05,4C'
19.53
dc

186
lllustration -I of Rs'8'00'000 as at.31"'
having an authorized capital
The trial balance of X limited'
December 2001 was as under'
Debit Credit
t{eSe----
*trtr(a*r."t tt t" ""'
5,00,000
slg" "t 50,000
Securities Dremium.
- - 2,50,000
;;;"a tTir!: :#*lo]^-,
u"rory
3,00,000
and macntnery \wu>t ''o'-'""'---' '
I Plant 20,000
, I ivestock 1,30,000
G6s.s profit earned during 2001 2,00,000
in"n"ru't"tj!" ,,_r.,^; :; ;;;;;
i6% debentures (issueo on i., J;;;t: inea o,
i ;;;;;';" land and redeemable on 31'12'2001

60,000 30;000
**"0.!',',T jiil''?i'^r,.rtttor,tr'tt;tr'.rrtt, 50,000
at c
Stocks as at 31.12.2001'
: is lower 19,000
: Salanes : I 10,000
I Directors' fees
15,000
General expenses
6,400
. Cash at banK .
600
c2sh in hand
20,000
Bills receivable -
4,000
, Discount on issue of debentures 10,000
Profit & Loss Account
Governrnent securities' face value

Rs.1,00,000 purchased on 1'1'2001 . -

95,000
shares of Rs'25 each'
ffi,ooo 1,70,000
Rs.20 paid upl
10,20,000 10,20,000

Furlher Information :
paid to
Rs'2'00'000 were allotted as fully
(1) of the shares allotted, 2,000 shares worth
was acquired'
vendor from whom a running business
but are considered good except
a debt of
gl oiai" o"utors, Rs.10,000 were outsianding
Rs.5.000 doubtful to be Provided'

1P.7
 ot
to:],;;-"'income.tt",^,^ ^, the balance sheet
00 is to be
Rs 25'000
made for wa:

(3) A provision lT 1T ::'ll"",1i5$l'l

i";;"r'"'.*"
il"" Jffi 'J;;"
l\ *=frffi ff ii:,:l ilJil:T:['T::';:": ::::. .
t''
iovestrnents "ovided
{or' lncluoeo 'v]^ t^nz
*,', .. :: : * :',,',[ ?":[:, 1.":.1':Jjf
\"/
,u.,'o"
monrhs insuranct
r"il,
";"';.";
:
and on investment
i*ij]-*::iffi ""'.i,
-) |li"J:1,,11"1""1,}lJ"""o,o",r", cost or machinery
and 2% on
ror @ 6% orisinar
(7) tax.
:ilffi*l:?;"":?o'ouuo'nn'
-*;"'0
- ^^rporare dividend . ., k^,.
j:I,':,ffi ,,: :lffi il;
ari
accou nt d the an b
.",
,u, " : : 1"'^",:::::
ereoare Pro{it ano
o" si 'tz zoot '
"n"'i "i Modifiedl
tlcwA - ended 31.12'2001
account for the year
Protit and loss
Dr.

188
profit and toss adJustment account for th:lIt t"d"dl'oryI
By balance b/d 10,000
25,000
To proposed dividend
BV net Profit b/d 21,750
6,750
To balance c/d
31,750
31,750

Baf"n"e sh€et as at 31'12'20O1

Assets Amount
Liabilities Amount
Fixed Asseis
Share caPital
Land & building (cost 2,44,000
Rs.3.00,000)
8,00,000 Plant & machinery (cosr 2,76,000.
Rs.4.00.000)
20000
lssued, subscribed & Paid uP Livesiock

capital
each Investments
Enoo inares @ 1oo
.-.'',r_'-
fr rtlv. "quitv
naid 5,00,000
fnvestmeni 4o/o Govt' 95.000
securities (face value
Rs.1.00,000)

lnvestment in shares 1,70,000

2,00,000

Profit and losc 6,750 Current assets, loans al

advahces
50,000 A. current assets
Securities Premlum
Secured loan
stock-in-trade lqqqg-
1,00,000 Debtors more than o mon$s
10,000
Others 50,000
60,000

Curr€nt liabilities & Provisions

Lus" ptwition for doubtful s5,000
debts 5,000
55000 55000

A. current liabilities
30,000 Cash in hand 600
Sundry creditors
6,000 Cash at bank 6,400

3,000 Bills receivable 20,000

.Auditor's fees

4eo
 B-.uount and advances
rffi't""aeEgg!tr:
:
il6ii6n"out exPenditures
Discount on debentures

9,45,750

(b) .

(c)

(d)
(e)

(f)

(b)

(c)

(d)

190
4.Exp|a|nandi||Ustratehowthefo||owingitemsaretobeshowninQagsaltrfEgsheelofa
contpany to comply with requirements of the companies
Act 1956'

(a) Sltare capital

(b) Secured loans

(c) Fixed caPital expenditures

,. :':_ :il"J::l'ffi rhe forowins maners when preparins the annuar accounts of a
Act 1956'
company in accordance the requirements of schedule Vl to the companies
amended upto date.
(a) Bonus shares issued
(b)BalanceofforfeitedSharesaccountafterthereissueofforfeitedshares
(c) Securities Premium account
(d) Payment to auditors.
6. 'Wh"t do yo, r"an by contingent liabilities. How are these liabilities shown in the balance
. sheet of a company?

7 . Write short notes on :

(a) Corporale dividend tax

(b) . Provisions for taxation and dividends
(c) Miscellaneous expenditure to the exient not written off'
g. Give a bpecimen form of balance sheet and profit and losF A/c of a company according
to. companies Act.

9. Give an imaginary form of the profit and loss appropriation account of a limited company.

10, Prepare a summafized form of the balance sheet of a company as per companies Act
1956, taking imaginary figures.

11. How do you calculate profits for the purpose of the calculation of the managerial
. remuneration? what are the maximum rates of remuneration allowable under the
companies Act to (i0 directors gii) managing director and (iii) manager ? is there any
provision for the payment of the minimum managerial remuneration ?

12. Indicate the correct answers :

(a) Assets in the ba|ance sheet of a |imited company are arranged in the order of :

141
 by deductitg
i' Liquidiiy balance sheet:
liab ities side ot the
n the
up saP!''"
(b)
o) u"* the called il;;dl-.-
',H::;: of compar
or a compan!
:.i':ffili?::
i#'u.o;, -,^"
the assets side
.,r
of the ballnce sheet
barance
I
shown on
vl Fictrto::^a::::fle
(c) t ,o0", u]
side unoet
--^;rc <iri€ "-
tn" tauOing
unO", assets
th e
company is shown on
stock
case of a ioint
,.t\
(o) Goodwill in
, balance sheer'
i"rot"n "r liabilities side of the
the
; shown on sheet under
(e) share forre'-t side or the balanie ''
:^"::::;"-n
sn on the liabilities
dividend is
{f\ Unclaimed
heading i
surPlus I
i Reserve and

Current liabilities
and ***'"ll'
ii' (f) (ii)l
(d) (i); (e) (i);
(b) (ii)i (c) (iii)i
Ans [(a);

it;,,;;U*#**-**g*u*U**:Hf, iii'trfil
rules, 1975:

192

t
 Reserve ; Maximum rate of Dividend
Ans. [rs.1,20,000 can be safely drawn from General
10% on Paid uP CaPitall'
of rs'1'00'000 to the credit of
.
'1 The accounts of the Ludhiana Ltd' Showed an amount place
of which the Directbrs dbcided to
profit and Loss Account on 31"'March' 1998 out
to debenture Redemption Fund' At the
rs.20,Oo0 to General reserve an; Rs'5'000 a
it was decided to place rs'10'000 to
. annual general meeting held on 1Srh June' 2000'
development Reserve-and to pay a bonus
of 2 %% ol the profit to the Directors as
half-yearly dividends on Rs'2'50'000 5%
additional remuneration. The payment of the
1997 and March 31' 1998 was
cumulative preference shares on September 30'
of 10% was declared on the equity share capital
,confirmed, and a dividend at the rate
,bfthefaceValueofRs.3'00,000;thebalan.eofprofitand|ossAccounttobecarried
forward to next Year.
the above arrangements'
Make out profit and loss appropriation account showing

Ans. lsurplus carried to B/S Rs'15'750]'

dividend rs'4'250'
Hint. Corporate dividend tax @ l07o on Rs 42'500
Krebs Ltd. Before charging depreciation
2. For the year ended 31", March, 1g98; the profit of
to Rs 3'00'000 Depreciation
on fixed assets and managerial commission amounted
of 10 percent of the profits
. for the year amounled to Rs'60,000 and a commission
(befor:e charging such commission) was payable to the
Manager'

Thepaid-upcapitalofthecompanyconsistedofRs'10'00'000dividedinto5'000'6per
equity shares of rS'10 each' Interim
cent preference shares of rs l O0 each and 50'000
year' There was credit balance of
dividend at 50 p. per share was paid during the
rs.35,000 in the profit and loss account brought from
the previous year. The following
passed at
appropriations were proposed by the board of directors and subseiluently
the annual general rneeting of the company :

(a) to pay the year's dividend on preference shares'

(b) To pay a final dividend on equity shares at 50

p' per share to make a total dividend
of re. 1 Per share for the Year'

(c) To provide for taxation @ 50 per cent on the net profit'

(d) To transfer rs.25,000 to the general reserve'
(e) To 9afry forward the balance'
You are required to show the profit and loss appropriation
account'

.t o?
 B/S R!
rs'2'16'000; surplus carried to
before provtsto
'-n for iaxation
Ans. [Net profit . --.,:n^A hccause
provrut'u u' dividend paid
been
tax of rs;8fqOo0,has
t'"" Corporate dividend to 1'6'1ee7'
Hint.
is after
:;;;;;ich
3 ilff:iilru,H";:*,:ru ili$ff:ff:$il:ft:i:';t:;
31.3.2000 :

General reserye

balan
i:il:"fiq:'ilil'Hr'i
March, 1998 and the
adjustmenrs: :by'10%
,,^^r provide half vear's
^.^\,iA6 h-alf ye interest o:' :d
' Depreciate plant and machinery t-i11; 3i;il:$i$;iL:
Arso writeorr rs.2,s00,,"'"bi"''#i"o- c t-
debtors stocK on '
;il;i';** rs'4'250 on sundry
8'7501'
ilil; ;**tate dividend tax rs'1 E' Chandra Lic i
*"'" extracted from the books of
1-
' The following Uut"ntu'
."o"o it-liarch' 2ooo :

194

I
 Rs.

9---------)
Furniture I
6,00,000
60,000
I 60,000
Motor vehicles
,,'
Equity shares of comPanies
I
I

4,00,000
4,00,000
Stock-in{rade at cost. : l
I

SunOry O"Utot", unsecured considered

good ]
2,80,000
1,72.000
Cash at bank
1,30,000
Aduanc" against construction of building
I Share capital
each 10,00,000
llo.ooo equitv shares of rs.100
|'''" 3,50,000
I Sundrv creditors
20,000
I Pr"fit 1""" *count (credit balance)
t: ""d 10,00,000
I Gross orofit
t:,':
I oividend received on investments
r0,000
l::: 2,20,000
I Salaries and waEes
I
8,000
25,000
10,000

15,000

P{eparetheprofitandlossaccountofthecompanyfortheyearended3l"tMarch'2000
' _'_-bulance sheet as at that date affer the {ollowing adjustments :
"l-ri
(i) Provide 1 0%. depreciation p.a.

(ii) Stock has been revalued as Rs'3,60,000' This has not

been considered as yet'

(iii) Debts more than 6 months are Rs'80,000'

(iv) lgnore tax Provision.

Ans. [Net profit for the year Rs.6,20,000; B/S Total rs:19,90,0001'
dlvided into
2. Big & Co, Ltd., ls a company with an authoriz€!-olplltl of Rs'5'00'000
were fully called up.
s,6oo Equity shares of Rs.10b each. On 81.3.2000 2,500 shares

195
 14,300

38,700
,ra ,na

B0,5CC

1 7,1C:

1,34,7C:

25,0i:
15,73:

3,2:r:

\i"j'Tilffi'";
31 .3.2000 and the
balance she
information is given
:

(1) Closing stock - Rs 91'500' and furniture at

15% ani '
plant and machinery
(2\ Depreciation to be cnarged on
respectively' tnn qalarv - Rs'1 '20Q and Rent- Rs :

Rs t5'200't1*:
h^
(3) Outstandingliabilities-wages-
is io be provided'
on paid up share capital
(4) Dividend @ 5%
is t::-e ot"::o:1-..,"0,"
(5) corporate dividend tax @ 10"/o B/s Rs.e,020; Brs
surplus can
proflt Rs'9'1'300; Net profit rs 16'275;
Ans. fGross
rs.3,50,3951'

196
 uNlT - lll
LESSON -I

ln this unit we will see how the goodwill is valued :

Definition of goodwill
Meaning of goodwill
Features of goodwill
.good
Factor affecting valuation of will

Need for valuaiion of goodwill

Methocis of valuaiion of goodwill

Miscellaneous examPles
Review exercises
Prescribed books

LESSON -2

ln this lesson we will discuss how the shares of a company is valued ;

1. Meaning of share
2. Need for valuation of shares
3. Factors affecting vaiuation of shares
4. Miscellaneousexamples
5. Review exercises
E. Prescribed books

VALUATION OF GOODWILL
 will
affecting valuation of good
13. Factor
of goodwill '
14. Need for valuation
of goodwill
15. Methods of valuation
16. Miscellaneousexamples

17. Review exercises

18. Prescribed booKs

::i:: .",ffi , - *"1, 11"^y1g*fffjir::::1"ffiH:Ei{;

,",,,1[:::'J;"':":::riTii:1"i:li',i[*-",x,U';1.:::""*'"i':ii"i:ly#fl
,,u,:,;xn*:tT{i['H";*;i::::^il:ff :,5sl^r'll;g:^:::*h;
m#:*:;ilil}[*'ffi ;xil'; ;;*" assresa'ie oft he
il'.ri'""1't#"1*5;:;:5,fJ'""1'T:;:
;f *":"'l;*?lTxJ: $: :::i::::
iair varL

MEANING oF GooDwlLL value of the

n,.'nrlwill is the represent
dwl I i s rh e re
utat' n
:"fi ,:""r"J,:' ll5 u,.",.
p
G oo

anticiPated excess
earnings' Jnil;
t*t:5::::""""-:::cu*ar which distinsuish it rrom other assets
ar*i
reatures
them here
worthwhiie considering

Good w,
(1) '"* '" ::liil:;:[: ] ff111":;:15,i'i:'::']:;l'T''l:"--#
business is more
than lne varu\'
:"^'_",,," net separable assets.
than the of irc
value .,t its n
is less
value of the buslness to go
of the intangille faclors contriouting
each
to separately value
(2\ lt is not possible incurred ir
to the amount invested and costs
no relation
(3) The value of goodwill has
circumstance
t time due to chansing
\n/ ::'J::
,-., or soodwlrluctul::^l:"^l''"
to business'
u'u int"tnur and external it differstrom d
of goodwill' lt is subiective and
uutuution
(5) There can be no oOi"ttiu"
t"ooj-' business' When a business
co-
inherent in the
t;y be purchases or
,rt

198

I
 ourchasedandthepurchaseconsiderationi:::::T;l$""J#["":t'llqf'#.1
u.",",,*"'o'""0;-
j,i;lll:X;'j"J:,1f""'T::;:nm1l,:ff ','"1#"
gooowttt rb rrv'vvv --
only when an amalgamarruari"r,, is followed and
pooling or **n"o
"'
case of merger' ""o'""'- --.. .
vALuE oF GooDwlLL and the
FAGTORS AFFECTING : the
to
.-^ gooowrrl
loodwill of the business
factors which contribute
There are several
lisied below
:nportant ones are
product in the market
i) Demand of the
of the worKers'
2\ Produbtivity levels
efforts'
and development
-?) Research
relations'
:) Good industrial
of ihe business
.5) Locational factors qualitv and
sales service'

Popularitv ot
p'oo"t'in terms of "--:::l:.jtt
i6) t::-lt:::"'"
attitude and ""tt::::
(7) customers' f avouraole t"uo
pro{it or earnins capacitv t t':*:'l::::,:lt
(s) rhe companles'
with established
(9) Technical collaboralion
OF GOODWILL
NEED FORVALUATION
a,u atio n of soodw'
|
9*"^* :i"ff"fn ;: H:::,':""j:il f:J::l'l:
rh e n e e d f or v at the time':t':Tt:;;;;ership there are several
it ts usuallv valued
case of a sole trader' tow:t"^Y'":T';"J'
fi il; pavable bv the buver
nas to be valued'
They are :
circumstances *n"n nooJ*itt
is admitted
1ai Wnen a new Partner
or dies
(b) When a Partner retires sharing' and
ratio of profit -
is a change in the
(c) When there

(d)Whenthereisdissolutioneitherbysa|etoacompanyoramalgamationwithanother
firm.
comPanies
ln the case of limited
amalgamale
(a) When two or more companies

199
 over
(b) when one company td<es "notn": ,,. . ,*.^-^.t
in another company, and
acquire controlling interes
(c) When a company wants to
the business'
(d) When government takes over
GOODWILL
METHOD OF VALUING
as follows :

various methods of valuation of goodwill

There are

(1) By an arbitrary assessment

(or capitalization method)
of expected net profits or earnings
(2) By a capitalization or earning'
01 years'purchase of past average pro{its
(3) By a certain number
(4) By suPer Profits or earnlngs
a. Purchase of suPer Profit

b. Annuity method
profit method'
c. Capitalization of super
:
ArbitrarY Assessment of the partles
is arrived ai by making valuation by one
The valuation of goodwill lN absence of the required
information
t" *ni"n'tn" oin"' ug'""t
vendor or purchaser
p-,or,t u,n o, "
" " T' e" tne: v T :l'i*iff ::JfJlilul;: *:t li'i*: J?:: :i: : ff l

mav together estimate

a"""rrm"nt of goodwill'
method) :
future net profits (or capitalization
Capitalization of expected
goodwill by this metno
computing
steps to be taken in
The following are the main
it is expected will be
earned in future'
net profit which
(a) Ascertain the average
a suitabre return on
c

(b) capita,,ife'T ::,^:'::l,x,J["rr::]i::J'o:il:j::'"'

invested in a bustnes assets less o
assets used in th e business i.e.,
tangible
1.\
\u/ Find the value ot tne net
preference capital'
i'uou','u, including the obtained in (l
as per (c) from the capitalized profit
assets
(d) Deduct the net tangrole
the difference is goodwill'
provide thelcasi:iIffI"J::::i::"ilT:lil;
Past adiusted profits senerallv
reduction-ls I
is expecied to be earned in future' A income tax p
which tn" tu'" of a limited company'
(if ihai has not already oJ.ffi;);ln

200
 the
recurring expenses.not yet deducted is to be deducted and
on such profit. Further the
to the profit to get the adjusted
non-recurring u*O"n'"' u''"ulu O"Jt"* t"
;il;; 't l"
goodwill
:10-1::*
by this method is arriving at
what return on
profit. The main difficulty
't to the particular business concerned'
capital is cleemed appropriated

Whilemakingtheestimateoffuturemaintainablep|o{itonlhebasisofpastprofits,the
consideration :
ioilowing points are to be taken into
and
expenses should.be excluded' Interest on debentures
il) All unusual working are revalued tor
un ri**Jl""ts should be excluded' lf fixed assets
depreciation
'rro-p*tittt"" tn"uld be based on the revalued figures of fixed assets'
goodwill purpose,
from the capital
non-irading investments should be excluded
(2) Non-trading assets such as

employed anC in"oms'AJriu"O

t'o* such asseis should also be excluded Oroiit
from
should be made"
for liabilities $uch as provision for taxation
(3) All necessary provisions
reserves' sinking
;; ;t amounl tran:ferred to general
But appropriaiiott shou|d no| be taken
redemption
"t';;;;
oiu ti"u,tny and dividend equalization reserve
fund for
into consideration'

(4) Preference dividend should be deducted'

for or five years during which
(5) While calculating average proiits' profits,lo'^|1,:utt
considered'
should be
conditions have remained normal

(6)Effectsofdeve|opmeniswhichhavealreadytakenp|acebutwhoseresu|tsarelikelyto
considered'
come in the future should also be
in a
past four or five years have been increasing or debreasing
(7) lf the profits of the
the profits of the last vear
il;;;;;-;,., to giu" *uru i*portance to
significant mann., taken care ol by taking
profits of the first year' This can be
and least importance to the profiis of 1"r ydar;
ot"'!int'* weights as 1'2'3'4' and 5 to the
weighted average oroin if
The practice is not to be foliowed
2"d year, 3'd year, o-;;";k s; vear re.snlctively'
fuiure should be lower
dectine of profiis. In that case, profits for the
there is consistent
year'
than the pfofits for the latest

lllustration - I (Gapitalization Method) :

has earned an average

desirous of selling iis business.to another company
Acompany
profitinthepastofRs.50000perannum'ltisconsideredthatsuchaverageprofitfair|y
future excepi that :
lpr"r""r" tn" profit likely to be earned' in the
payable by the
charged against such profit will not be
(a) Director's fees Rs' 10000
uutilv cope with the eidditional
purchasing *"'0"t, *i"'" *iitting
?:u:1,:un
payable to the directors.
uJ*in,ruuriu. work ai present fees

201
 b,Ren,orRs200o?T':,T""1#l",lll1iTlJilll
\v/ jiltl';,,X:[f]ti;
in *" t""l^llu"-'n'n-r""rr"'y
charge the staff {or
z

suPPiY the
accommooatrur"'""--
company. . ,-^ .,onr{or company al
the propo:ed-:,1t:,i

:"':*:iliru ; o n capitar
i.vesteo
T ir e ueva
"' -l^" :"j
I

1 500000
:il:i:::::'*::'H
sale was Rs "no]1,
*"",,r.o*o"no 'ton of its busin€
rhis type oi commodtty' ^cr^^r6.1 hv the sale
biil
*ould in no way
l" 0r,0,,". ,-1::jl;;
rhe profir of the """0:""""J;;;";'il":T:iI1n" ""
of sooow,,
::oy uay,.-,
uaru"
to the pirrchas\nn "o*o1ll,'nrtng enterprrse vdruu'-'-
was a cor
"""nOo' "ornPunY
iuture net Prolits'
"i'"lo"tt"o
Solution: the value n:O*
Gatculation of " Rs,150001

Average net
3c
Director's fees 1B(

Rs.'1801
Gooc,oxroo
Esrim499J9l!I9 10% ie 10
fi* i'----"'o**ed ai Rs.15C
3(
Less n9!le
r\l\ ---Fd simple average rltiru'v-'
t:'J;;; by following
retail trar
2 (capitatisation
,tion - on business as
,,a carryins
value of goodwl
Ascedain the
:
ihe following in{ormation

;";" ;;""t u'on ttioo:}1Y

ittd rpjgprg! l#iffi-at cost
#iiEE;tn;T=?jrr! I'I^.r^^.ociation _"-
ffiG;a]o;;;ccount
Bt,k.!9gl9q uo-_."i."'3115'i"*t *
ffil*,"-",t*
202
 pald up capital as aforesaid o{
operations
The companv commetlced l::-1:l:,"
,f tol tT n
Rs 250000 l'he protits nu*|-" Otou'O'nn "t '
"u*ud' { ooq 1996 1997
Year 1q93 1994
TBOUU 85000
Rs. 61000 64000 71500
profit:;'
1ax at the rale of 50%
has been payabte on these
ihat Income
. You may assume
taken as
paid by the fl',lhlfour years is 10% which is
The average dividend "otpunY in the business'
return expected on the capital invested
reasonable

Solution:
78000 + Rs'85000)
years (Rs'61000 + Rs'64000 + Rs'71500-+ Rs'
Profit for 5
= Rs'3'59'500
Rs.1,79'750
Less income tax @ 50%
Rs. 1,79'750
= Rs. 35,950
A'/erage Profit (Rs' 1 79750/5)
Rs.35950x 100
- Rs. 359500
Future profits capitalized at
10% = l0
Rs 4'75'000
Total Assets
Rs.25'000
Less Goodwill

Less liabilities
Rs.1,68,350 = Rs, 193350
(58350+90500+19500)
Rs. 2,81,650
Net tangible assets
' CaPitalized Profit
Rs'3,59,500 *

Rs.2'81'650
Less net tangible assets
-7-7 Aqn.
-
Goodwill
:
Purchase of Past Average Profits
probably is the
goodwill is commonly met wiih in practice and
This method of valuing basis :
most generally understoJd' lt is calculated on the following
one
numberofyears preceding valuation are averaged
agreed
(i) {he profit (gross or net)for an
profit earned during that period. Average
used
so as to arrive at,n"
"uurln""unnuar
weighted average'
mav be simple avegarge or
such average
eslimated to be worth so many years purchase of
iii) The goodwill is tnen

203
 c'
of eyars selected is presumed to bear relation to the number
profit. The number
past association'
benefit to be derived from
a clause lo th:
is generaily adopted when a partner dies or retires and
This method
padnership agreements'
effect is frequently {ound in
profits are averaged and the number
of year=
years ousl \/hich the
Tne number of one and fir':
considerably vary in practice but generally fall between
purchase applied, may
as follows :
I""tl. in't ."thod suflers from two defects
of years purchase of profits
(i) The uncefiatnty as to the number
business is not considered'
(ii)- The capital to be employed in the

ThismethodiSadoptedforvaluingthejoodwi||oftheprofessiona|personSOrfirr.s
the amount c'
or cost accountants' Doctors' Advocates eic lt ignores
such as chartered
profit'
capital ernployed for earning the

lllustration - 3
profits) PLTC proposed to
purchase the busrnes:
(purchase of simple/ weighted average
is agreed to be valued at
tree years' purchasl
gooowitlior this purpose -fr'
carried on by Shri C profits of the past four yeats'
profits and (ii) Weighted average
of the (i) Simple average
are :
apPropfiate weights to be used

19S4* 1,1995-2, 19S6-3, 1997 -4'

Rs l00G'
The profrts for these years are'1994
Rs 101000' 1995 Rs' 124000''1996
matles are revealed'
Rs 150000 ; ;;'U of the accounts the following
and 1997
"" plant incurring F
a major repair was made in respect of the
(a) On 1" September, 19gO
The said sum is agreed to
be capitaliz
30000 which u*o'ni*" tf't"'g"d io
'uu"n'"' of depreciation at 10% per annum
for goodwili t'r*'"'i"t tc"t to adiustment
"nf
reducing ijalance method'
by Rs 12000'
(b) The closing stock for the year 1995 was over valued
for the purpt
charged of Rs' 24000 should be made
(c) To cover management an annual
of goodwiil valuation'
of the firm'
Compute the value o{ the goodwill

Solution :

204
 Calculation of .qdjusted Profits

Profits : 1994 1 01 000

Less management exilenses 24000
Adiusted profit 1994 77000
Profit : '1995 124000
Less over valuation of closing stock 12000
Manaoement exoenses 24000 36000
Adiusted profit 1995 88000
Profits 1996 100000
Add : over - valuation of opening stock 12000
Major repairs of piant to be 30000 42000

Less depreciation on capital expenditure 142000

@1Oo/o per annum for 4 months from September 1996 to
lroooo *J9 * 1)tooo
December 31 996 '1 \. 100 r2l
141oob
Less manaqement expenses
=
24000
Adiusted proflts * 1996 1 17000
Profit - 1997 150000
Less 10% depreciation on Rs.29000 (book value-Rs.30000- 2900
Rs.1000) exp 147104
Profits - 1997 '150000
Less 10% depreclation on Rs.29000 (book value Rs.30000 - Rs. 2900
147100
Less managernent Expenses 24000
Adjusted profits - '1997 123100
(i) Simple average profit method
lnlel nl erlir rqlorl nrnfitc
(Rs.77O0O + Rs.BB000 + Rs. 117000 + Rs.123100)= Rs.405100
average prof it= Rs.1 01275
Value of goodwill = Rs.101275 x 3 = Rs.303825
(ii) Calculation of weighted average profits
Profit Weiqht Product
1994 77000 1 77000
1995 BBOOO 176000
19S6 1 17000 J 351000
'1997 1231 00 4 492400
10 1096400

205
 pr'rrchasi
Goodwill at three years
10 = Rs.109640
Average weighted
profit = Rs'1096400 '
*".''o6uaox 3 = Rs 328920

(4) super profits profits based on rrorfllirl

t:rk
|ha normal
profits over u," io rowinu th
Ir is rhe excess
or tne averase
in industry' For
"".1::::;:;;,
computauon o.in
,"trntr", ,"oo'"ntative firm
tactors are required: ..l""'ffi
'::"J
,''-ff ::::*,*tLTl,ll
Normalrate o{
nvestment in
investment
re"'i
rn d
jl""',1",:'.il:'ilil?TJ]il::fi
lti:,'.t"':"""1r::il:'',
u""'-'
Par
tYl,,^^,
a particular
.t, o" :"fi
of pure rate of re
"nn,esate
rate of return.
rick raie
e ' return on risk
rtsK secur
rr.,s
free ities) ^-^
and risk
(i.e.,
(i
: ^ , on .. L^^i-
the hesis
^^ rh6 ^r assets side
basrs of
items or liabi
: - lt may be calculated
(ii) Capital employed

,..::'r:,"':":';asseisside":li:|:T'::::"itrilffiff
**"1.."-
,-Xdeinvestments+c'l
Assets - Dedentures - + accumulated balan
^;"r.*""u ,nur" capital ross account + reva|
capitar emproveT:l
capital reserves'S:":t"ll
:J,:HY#j::flT::.'Jffiru;,
assets.
- Nontrading
asseb:
profits (or loss) - Fictious ";;; employed' A
,:-::""^ can
of capital employed
be average capitar
cen be
figure
. A refinement in the as follows :
can be calculated
;;;;tloved
Average caPital EmPloYed of the I
+ capital employed at the'end
at.the beginning
= lz (capilalemployed
average capital employe ta:
. ..^^.,. nrnfit after tax
the year - % of current year's profit
at the end o{
= Qspital emptoyed year's profit aft
of the year +% of current
at ihe beginning
= Capital emptoyed capital e
the.normal rate of return with
by murtiprying
(iii) Normal profit : lt is calcurated as ihe case may be'
or average
"upitui"rnptoy"d
i e'
profit method had three variations
Super

(a) Purchase of suPer Profit

(b) AnnuitY method
(c) Capitalization of super profit'

206
 :
P rchase of suPer Profits
rndhoclof varuins goodwill' attention':
t:::1:.p.:l1::::t^:i:i'- which are
rrrr> rrr",u'vu
lL this
It annual future profit'
deducting from the estimateo
those profits remaining after
management' and
(a) Reascnable renruneration of proprietors and
in
a reasonable return Qn the amount of capital invested
(b) An amount constoered to be
the tangible assets'
of year' in such a way as
averaging the past profits it is desirable to cover a span
While be made for
possible ,"u.o"ui changes and fluctuations. Allowance should
to include all expenses
against pat profits which are not likely to recur and also for
expenses emerged which is
to recur iotlu-iutu*. rne next step is to reduce this by amount
which are likely This reduction
to be reasonaot" ln ,""pd"t of the services of the proprietors'
considered against the
be made wn-e-re-lhere had been no such.charge for management
would only from the
profit selected' fn"--i"ttti taxation may also require to be considered
average 'o
purchaser's Point of view'

TheremustatsoOeOeOuctedandamount'whichiscalculatedtobeareasonable
returnonthecapitalinvestedintangibleassets.Thereasonablereturndiffersfrombusiness
to business.
.Thispercentageisthenappliedtothecapita|investedandtheresu|tingfigurededucted
fromthealreadyreduced"u""g"profit'thefinalresultgivingtheaverageannualsuper
profit.Onthisbasisthegoodwillistobecalculated'sayfiveyears'purchaseofsuperprofits' to above by
the average annual super profits referred
thbn it will be anived at by multiplying
five.lfthesuperprofitsarelarge'ala'genumbu'ofyears'purchaseisallowedforcalculating basis
.the people, goodwill is usually valued on the
: value of goodwill. rn ca.e"ot protessional
profession personal skill of
of one year's pur.nut" ot g';" ;es
earned because in case of a
role in earning the income'
tnu orot""slon"l will play a very important

llluStration'1
order to determine.,he purchase
The XYZ Ltd is to be absorbed by the India Ltd' In
.
consideration'thetwocompaniesconsidereditnecessarytoVaIUethegoodwi||attachingto goodwill shall be
business of the Asia utJ.-it is agreed that basis of the calculation of the
the over 5
super profits' the profits being average
three years'purchase of the average annual

br lhe last 5 years before charging income tax at

5070- a.re

bn D.G$t\Qs and Rs 432000 {of each ol the

 on
Ltd will be aO'!:T"O to the Board of India Ltd
of the XYZ
Two of the directors

was maoe agdrr r-r' 'v r' -

'-
"o"o,o,,In-""i0-*.:g:1[J**ru;:;nll,";i,l:,li.l:l:l',.'""'1"'H:i::il;
r'
It the past no charge
concerned. , :- -^+ +^nnihte assets over the *'
period is Rs.10,96'00C'

;"Jilr,"Jl'll'*:#rfuft
calculate the value
J'*4dn*:*:*lr:.****ff
ur
suvvvv"' "' ' -'
Ltd is 10%
Solution + n^ Rc.560000 + Rs.432000 =
e^rnnn + Rs'5
Rs'352000
Rs.224000c'

,"J ,r"t* = *''496666 + Rs'4g6000

224q00 1Rs.448000
=
Average Profit = 1.- Rs.448000
Average Profit
changes (Rs.48000x2 Rs' 96000
Less directors serv'tce Rs 352000
Rs 176000
Less lncome tax (9 cuTo
Rs 176000
Proiit after tax t0. Rs. 109000
(1096000 x 100'
Less normal rate of return
Rs. 66400
SuPer Profit
Goodwi|l=Superprofitxnoofyear,=Rs'66400x3=Rs,199200
Itlustration - 2
:
Vishnu Ltd is as follows
The balance sheet of
31 - 3 - 1998
Balance sheet as on Amour:
'15C:,:

v5L -'

n'791

208
 This company's business is to be puichased by shiv Limited. Your are required to
value the goodwill of the company, after taking into aocount, the following information :

(1 ) The reasonable returp on capital bmployed ih thb Class of business done by the company
is 12o/o,

(2) The company,s average profits of the last five years aftef rnaking 50% provision for
taxation, amounted to Rs.47500.

(3) The present market value of the land and building is Rs'1 ,10,000'
(4) The other assets are to be taken at their book-values'
15) The directors of Vishnu limited (two in numbers) are to be appointed on the board of
directors of shiv limited, The worth of their services is (and will be in future), Rs.5000
p.a for" each of the directois, but no charge has been made, regarding this against lhe
profits of the Vishnu limited.

(6) The good will of the business of vishnu Ltd is to be taken at four years' purchase of
super Profits of the comPanY.

(7) Depreciation on increaged value of Land and Building may be ignored'

Solution

Calculation of capital employed

Land and Building Rs.110000

Machinary Rs. 60000

Stock Rs 47500

Debtors less BDR Rs. 47500

Cash and Bank Balance Rs. 3500

Rs.278500

Less creditors Rs.63000

Depreciation fund Rs.22500 Rs,85500

Capital employed RF.193000

Calculation of super profit

l,verage profits of last 5 years qftel tax (given) Rs.47500

209
 100
tax (47500 x Ks'Y3uuu
Average profit before 50% J6-)=
(2 x 5000) = Rs.10000
Less directots remuneration
Rs.85000
Average Profits (irr future)
Rs.42500
Less 50'/o tax
future) Rs 42500
in
Average profiis (af1er tax
12% on Rs 193000
Less rearsonable return @
Rs.23160
Capital at emPloyed
Rs.19340
Super Profits

Calculation of goodwill

GoodWillat4,yearspurchaseofsuperprofits(Rs.19340x4)=77,360.

ANNUITY METHOD v
of super profit method €xcept that super profit
This method is simirar to
that
numbef of vears' purchas<
arrived at is not multiplied o; ;;;';t representing::":::t
present worth (
till is calculated by finding the
such super profits' The ""''J"i'*"d period discounteo a
super p'otit ip"' year) over the estimated
annuity paying the
appropriate rale of Interest'
pay out now in orde
the amouni of cash it is necessary to
We have to ascertain
goodwill is baset
principle thai the annuity method of calculation of
It is on this obtained tom the folk
unnuity oin''t to' n yua's aft per cent is
the present wortn or
'n
formula :
/ r\''
r-ir+ J
O=---;-
100

year at percent'
The present value of an annuity of Rs'1 for n
Where Q =
r The rate Per cent Per annum
=

n = The number of Years'

profit method
(c) Gapitalization of super

Underthismethod,theva|ueoigoodwi|lisca|cu|aledbycaplta|izingthesupt

210
at the normal rate of return. This method atrtempts to determine
the amount of capital needed
for earning profit. The value of goodwill i$ calculated by the following formula :
"uper
Average AnnualsuPer Profit --,,..'
Value of goodwill -=---::--:= --- """
Suppose the super profit is Rs.20000 the normal rate. of profit is 15%, the value of
goodwill as per capitalization of super profit method is
Rs 2oooo
t5%
- Rs.3ooooo
lllustration - 3

(Catculation of super profit)

From the following ihformation calculate the value of good will by capitalization of
super profit method :

(i) Average capital employed in the business - Rs.700000

(ii) Net trading profit of the firm for the past three years@ are Rs.147600, Rs.148100 and
Rs.152500

(iii) Rate of interest expected from capital having regard to the risk involved - 1B%'

(iv) For remuneration to the partners for their services - Rs.12000 per annum.
(v) sundry Assets (excluding goodwill) of the firm Rs.754762 sundry liabilities Rs.31,329.
Solution
Years Given profits Rs. Adjusted profits after remuneration
1 AA AAA 1,35,6b0
ll 1,48,100 1,36,100
lil 1,52,500 1,40,500
Total profits 4,12,200
Average profits 137400
Less normal expected return on capital (18olo 126000
on 700000 p.a)
Super profit 11400
Goodwill by capitalization of super profit super profit x 100
method Normal Rate of Retum
::l:::l:: = $.333t App,l
t8

211
 lllustration - 4 rs'78000;
for the Post five years are
profits of company after providing^for taxation is
The net emploved in the business
Rs.82000, Rs'88000; R''9;00; A"l Rs"99'000'
ln:^:"n't"' lt is expected that he
a reu'Jn-a-ble of return of 10% as expected'
Rs.B000O0 on which 'ute the next {ive vears'
.;;;;;;;- r; able to maintain its super profits for
annuity of super
of the goodwill of the business on the basis of an
(i) Calculate the value
of an annuity of one rupee for-the five
yearb at 10%
orofits, taking tn" p'ut"ntiuiue
.interest is Ks J' / o'
the excess of
difference if the goodwill is valued by capitalizing
(ii) :r
on .apitar emproved on the
basis
il:H;,l J"";;ilffi ;J':u; ffi;;;","tu,,n
of the same return of 10%'

Solution
Rs.440000
88000
80000
8000

reliable qnd is very fa

Calculation of goodw
is not desirable for ti

EXERCISES
:
LONG QUESTIONS
does it arise ? Expli
goodwill ? Undqr what circumstances
1 . What do you understand by
of calculating goodwill-
and illustrate the different methods
goodwill; briefly expt
that should be consideied in valuing
2. Enumerate the factors
their importance in this regard' !L^- *^rh^.
of valuing goodwill superior to other metho!
system
3. Would you consider the annuiiy
lf so whY ?

212

I
 at least three
? How is it generally valued ? Explain and illustrate
+. Wnut is goodwill
imoortant methods of its valuation'

Practical Problems

Questions
lasses in the
(Purchase of Average Profits) X'Y
andZarepartners sharing profits and
1. partnership agreement that on the death
or retirement
ratloof 2t2t1.lt was provided in the of the
,iouio o. .u'"ulated on the basis of, four years purchase
of a parinel goodwilt
retires on 30th June 1997' calculate
average net profit' f"t;;;;;;;;inn
for the seven years on 30th June of
'uuun every
ot gooo; JJ" i" l. *"", profits'"t"'.2
the amount
year are as follows:
Rs.
Year
32000
1991
1 00, 40000
72000
1993
64000
1994
32000
1995
80000
1996
72000
1997

Ans. - [Rs/44.800].
to p-urchase a business for Rs'80'000
1 . . (Purchase of Average Profits) X and co-decided Rs'24000'
Rs'20000' 2002 - Rs'25000' 2003 -
Its profits for the tast c yelrs are 2001 -
Tn"iis]nl;;;' atter uv tne management' Remuneration
2004 - Rs.23000.
'**Jo in he buqiness' for the managemnt comes
if not engaged
from alternaiive
"tpfoytgnt'
to Rs.3000 P.a.
purchase of the
valued on the basis of 3 years
Find out the amount of goodwill if it is
years'
average net profits for the last four

Ans. [Rs'60,0001

2.(PurchaseofAverqgeProfits)Thefol|owingpariicu|arsareavailab|einrespectofthe
business carried on bY bankeY lal'
Rs'50000; 1ee6- Rs'48'000
l"t
pronts earned by X:1ee5 - "1]tl"t lliil1l"
to stock destroyed by fire and ^ 1995
profits of
(b) Profits of 1996 is reduced by rs'5000 -due
included a non-recurring income of rs'3000'

213
 on investment'
(c) Profits of 1997 include Rs'2000 incbme future' Tht
and it is thought prudent to insure the stock in
(d) The stock is not tnsured at Rs'500 pa'
rnsurance premium is estimated
is Rs'10001
proprietor (not taken in the calculation of profits)
(e) Fair remuneration to the
p.e. .

years' purchanse (
the value of goodwill on the basis of 2
Your are required to compute
: uu"rug" profits of the last [Rs'79000]'
bustnes
l
has investeda-sum of Rs 200000 in his own
proflt] Mr Mital
3. [Calculation of silper
in"' The annual profit earned
from his business is Rs'450C
which is a very p'ontuof" part of his businer
of rs'10000 received as compensation of a
which includes u
"t
Premises'
have invested the mon
ro nrs engagement in his busin--ss, he could
As an altemative also cot
g"h; a normal rate of inteiest of 10% and
in long-term deposit with ""'ninS an annual salary income
of rsJ200'
S"iting
engage himself
'n "to'oy*Jntinuruoy
Considering2%offaircompensationfortheriskinvo|vedinthebusinessca|cu|atet raie of intei'
in capitalization of super profits at ihe normal
value of goodw't o*,is ousrnlss
ignore the corporate tax'

Ans. [Rs.38000]'

214
 LESSON -2

followings'
this resson you will be able to know the
Dear students after covering

shares
1. Meaning of valuation of

2. Need for valuation

of shares
3. Factors affecting valuation
shares
1. Methods of valuation of

lleaning of valuation of shares -

Theva|ueofsharesmeansthepriceatwhichthesharesarepurchasedandso|d'in
to two reasons :
uroJ a*change. He shares are varued due
jock market kno*n u"
proprietary company'
price as in the case o{ a
:0 Where there is no market
^ or intrinsic value
the market price does not reflect the true
'i) Where for special reasons'
of the shares'

bed for valuation of shares -

arise in the {ollowing circumstances'
The need for valuaiion of shares to
--
or ^'^ oimitarlv reconstructed' it may be necessarily
a11sifta1!-3::::,j|i;:f,o*'o",nri"rn
D where companies amarsamate
of tne shares held by the members of the
company bejng obser
"o*'*
anive at the value dissentins shareholders
;;;;"";;";
also oe trv to protectthe rishts of
or taken over' This maY
act' 1956'
,"0"f*" provisions of the companies
j"':t'y and dissolution of the'firm
partners
fr} Where shares are held by the ]:-"-lTpany of the
to value the shares for proper distribution
takes placei it outo'n"J'ntt""try
partnership property among
the partners' .ly
of proprietary compat to
is to be given by a member
Fl Where a portion of the shares market' it becomes necessary
another membe' it*iu'
tn" cannot iell it inthe open
accountant'
"t shares by an auditory or
to certify the fai' O"t" oiiiu'"
to know the
fr) when lvdrr is advanced
wngll a loan * tl"
::t:tllv^:t-t:":"^":lt:.",";"::snecessary
ioan has been advanceo
u"*" of .nur". on the basis of which
shares' it becomes
shares or debentures are converted into equity
Wten preference
 of equity sha|E
shares for ascertaining the number
necessary td value the equity
';b#; ;".r"i r", O*"rtqres or preferences shares which
;"
are to be conver'et

compensated on the acquisition of their shares

:
aie to be
(vi) When equity shareholders
then it becomes necessary to
vaa
unoer a scheme of nationalization
the government '
for reasonable compensation to be given to the holders'
the equity shares

Factbrs Affecting Valuation of

shares -
depends upon the following factols
Valuation of shares of a company

(a) PurPose of valuation'

(b) Nature of the business of the company concerned
(c) Demand and suPPlY for shares'
(d) The government PolicY
(e) Past perfotmance of the company
(f) . Grorvth prospects of the company

(s) The management ofthe company

(h) The economic climate
(i) Accumulated reserves of the company'
0) Prospects of bonus or rights issue
factors'
(k) Dividends declared by the directors and many other related
Thebasicfactorsfactor(orprincip|e)inhevaluationo}sharesisthedividendyie|d: in
to the normal rate prevailing in the market
the investor expects Io get as compared
rate of dividend declared by the direc
;;;; l;;6. For exariple - for sma' investors, whereas investors holding bulk of sk
plays an important role in the valuation of shares profin
(say '15% to 30%) would n" to the dividend rate' therefore for them total
"nit 'tt"tt the valuation of shares'
earning capacity) play an important role in

METHODS OF VALUATION
be classified as follows :
The different methods oi valuing shares may
1. Net asset basis (or intrinsic value method)
value method'
2. Earning capacity (or yield method or market
3. Dual or fair value method'

216
Net Assets Basis

,Thismethodisconcernedwiththeassetsbackingpershareandmaybebasedeither:

on the view that the company is a

going concern'

(b) On the fact that the company is being liquidated'

'
CompanY as a golng conce
-rn. lf this view is accepted' there are two approaches :
(o) '
i.Tova|uethesharesonthenettangibleassetsbasis(excludingihegoodwi||)
ii,Tova|uethesharesonthenettangibleassetsp|usanamountofgoodwi||.
Net Tangible Assets Basis (Excluding the Goodwilt)
, Under this method, it is necessary to estimate net tangible assets of the company (Net
..
the figures by this
iangibleAssets - Assets-liabilities) in order to value the shares. In valuing
'metiod, gssets are sound,
care must be exercised to ensure that the figui'es representinglhe
liabilities (whether in
i.e., intangible asseti and preliminary expenses are eliminated and all
assets are
books or not) aie deducted trom the value of.the tangible'assets. Nori-Trading
value i.e' replaiement
also included in the assets and the assets are taken at their market

(2)

(3)

217
lllustration - 1
31"' March 2001
is tne balance sheet,of X compafY as 9-n
The following Amount
380000t
Fixed assets
Share capital :
,1OOOO U"l" preference shares of Rs'100

10,25,001
shares ol KS tv sov"
200000 equity
in trade sundry 57200
Stock
ReseNes and surPlus :

12.780c
2250t
;"*"d l".*'iYo debentures current

Liabilities for

Solution
lvlethod
co Ltd' by the Net Ass.es
Valuation of shares of X
3420
1080

1214
221
ocl

218
G;;f"t"*; share capital
Preferences share dividend
5ozh on Rs.10,00000)

iatue or 2'00000 equity shar'e-q

4225 l0o
Value of I equity share = Rs.2t.t3(app)

;, cases soodwlr mav be

i:ilI J:liffi
worth
ll" i9:::.::*:': :l::?:"# ll,lff',il";
.^""1 :,TiH,:i::: i;yr;r I r*:"*::'"";:; ;T,T;;::;';l'",';
;l:::"J;Uff ;i:ff:l;L:ff ;ilil"";:lTIff i',ff:,llT"'l#[Iil'i,i;
;t::l*:*
[:T:lJ:1il.,:nil::1ffT:';iqi;ir*,:"x*::lilT:fl::::"1ffiT"i:']fi :
such a case' soodw'r shoq'd
:ffTTli ;ffi$:*,Tili:ilffi
other tangible assets forvaluation
purposes'
; in,ct;* ilrr
lllustration - 2
goodwitl)
(Net Asset Basis method including
2005 is as lollows :

summarized balance sheet of B'K' Ltd as at 31"tMarch

The

Balance sheet

other fixed assets at Rs.420000.

is independenlly valued tl
The goodwill ltil00.O:-":d
which has become payable' Determine
the
There was a contingent fiuuifitv
iint'200000
method'
,u*" ot both the shares under nei asset
Solution
method
Valuation of shares by net assets

219
 Assets : Rs.
Goodwill 50000
Other fixed assets 420000
Current Assets 220000
Notional calls 20000
(A) 710000

Less outside liabilities

Debentures 100000
Current liabilities 90000
Contingent liability 20000
(B) 210000
Net assets available for equity shares (A-B) 500000

Value per (fully paid) equity sha;g *.tr.t0

ffi =

Value of (partly paid) equity sha'fes = Rs.12.50 - Rs.2= Rs.10,50

lllustration i ' -
:) JUi.
(net assets basis method)

Your client intends to invest not rhore than Rs.15000 in equity shares of.iron foundry
Ltd. and wants you to advise him the maximum number of shares he can expect to acquire
with the said amount on the basis of the following information availabte to him.

lssued and paid up capital :

each
6% preference shares of Rs.100 Rs.500000

Equity shares of Rs.10.each Rs.300000

4s.800000

Average net profits of the business is Rs.57000. Expected normal field is 770 in case of
such equity shares,

Total Tangible Assets (other them goodwill) are Rs.949,000 and total outside liabilities
are Rs.95000

Goodwill is to be calculated at 5 year's purchase of the super profits, if any show your
working in detail. lgnore income tax.

Solution

Calculation of goodwill :

Total Tangible Assets (other then goodwill) 9,49,000

220
 Less outside liabilities +9Ag
854000
Net Assets
500000
Less preference caPital
Amount belonging to equity shareholders 354000

57000
Average net Profit
Less preference dividend @ 6% on
Rs'500000 30000
27ooo

Less normal return @ 7% on Rs'354000 24780

2220
Super Proflf
ol super
Value of goodwill at 5 years purchase
11100
Profit (2220 x 5)

Calculation of value of equity share I "

Net assets available for equity shareholder 354000

Add goodwill 11100

shareholders 365100
Total funds available for equity

No of equity shares of the company

is 30000

Rs'12'17
Value per equity share 9Rs'3'65'100 '30000) =
by the plient for Rs'15000
Calculation of no of shares to be acquired
15000 rTnnI
= 1200 (App)
No of shares which can be acquired = ffi
liquidated
(iii) Assets backing where company is'being

Assetsbackingmethodissoundif|iquidationiscontemp|atedthoughrealizab|qValue
shciuld be taken into u".ounl dhiil"aituttn
t *
eni it is desirable to construct statement

ofaffairssupported,byindependentvaluationftheJixedassetssuch.asland.andbuildings, some
goodwill prouirion inoutO also be made fo^r the cost of liquidation and 9q
plant and
indication may be obtaineo ut ii not
rn*h per share may be payable to members' t
those
is gener€tllv recommended for onlY? L
'
Net assets basis of valuation of shares
the earning is possible beqause of higrttly
companies where no realistic idea of .canlcitv e1\^'hen the company
itock of snutes is to be transfellsd
uneven past profits anO *r'"n i fa'ge

221
 is in winding up valuation on this ba.sis is not desirable for growing company. This mer
valuation is also suitaQle for a company, which has been trading at a loss in the pa
there are no pros!E'6\s i:"f 'earning any profit in the near future. This method of varu;
acceptable for statutory valuation particularly the wealth tax rules provide for assets b
valuatron of shares.

The practicai difficuity in this melhod of valuation of shares is the estimation of r

value of assets. There is lot of subjectivity in ascertaining the realizable value of a
which may give erroneous valuation of shares,
,,, 5., .

Earning capacity {or yield basis or market value} methcd

This method of valualion of shares may do valuation by any of the following two ,

(i) Valuation based on rate oJ return

(ii) Vatuation based on proOuiiivity factor.

(a)valuation based on rate of return : The term rate of return here means ruirrn
" as (:
a shareholder earns on his investment. The rate of return can furlher be classiiied
of dividend (b) rate of earning (c) price earning ratio. ,.

(a)valuaiion based on rate of dividend : This method of valuation of

shares is sr
for small blocks of shares because small shareholders are usually interested
in divide
I
The value of a share according to this methods is ascertained as fo ows :
, Possible
vatue ot snare :;------
rate of dividcnd
l\ormat rale---:;-
x Paid urr value of share
of dlvrclend
(b)Valuation based on rate of earning : This method of valuation
I share is partic
suitable in case of big investors because they are more interested in company's
ear
rather lhan what the company distributes in the form df clividends.
The value of a shar
be determined as follows :
possible earn ing rcte
Value Ot Share = :;--- , -- -;- x Pard up valuC Of Share
r\ormal eafnlng ritle
Rate of return basis of valuation of share is the method, which is to be used in
a
exceptlonal cases. under this method, the valuation depends upon he
comparison c
company's earning cspBgity and the normal rate of profits or dividend
that js currer
outside investment. To ascertain the value of share based on profiis earning
capacity, fr
maintainable profits and normar rate of profits or dividend at
which the profits are r
capitalized must be fixed" In arriving at the profits to show the
normal earning capacity gen(
the following adjustments are made:

(i) Non-recurring items should be allowed for

222
 Journal
Share Capital A,/c l-lr 50 10
To Share Final Call A/c 40
lo snare lonerture ,ryc
(For forfeiture of a share for non-paymerlt of final call @
Rs 10)
b. Share Capital A/c Dr 2,000 400
To Ca lls-in-Arrears A,/c 1,600
To Share Forfeiture AJc
(For forfeituie of 100 shares for non-payment of final call
@ Rs.4 per share)
Share Capital fuc Dr ?n 10
To Calls-in-Arrears A,/c 20
to Snare honetlure /vc
(For forfeiture of a partly called up share for non-payment
of first call @ Rs.10)

.l Share Capital A,i c Dr 25.000 7.500

To Share Allotment A,/c 7,500
To share first call A"ic 5,000
To share forfeiture A,/c 5,000
(For forfeiture of 500 partly called up shares which
only application money is received)

Forfeiture of shares issued at Premium

. According to section 78 of the Companies Act, securities full premium can be utilized
only for four specified purposes. lt means securities premium received by the company cannot
be cancelled bt the time of forfeiture of shares. Thus, the journal entry for forfeiture remains
as under :

Share Capital fuc Dr. (Amount called up on account of share capital)

To Share Forfeiture AJc (Amount received on account of share capital)
ti
To Respective Calls A,/c (Amount not paid on account of installments demanded)

However, when the amount of premium is called by the company, but not paid by the
shareholder:, its treatment depends upon its recording as foll.ows:

zzJ
 50000
x 100 = 25Y.
Expected rate of return = 200000 (i:er, equity caPital)

F---cted 4'-'-"" x
L^Pvv lve Rcturn
Value per equity share Paid up value of equity share
. Normal retrun

=25% "to =25

t0%

lllustration - 2 (Valuation of preference shares & equity shares by rate of dividend)

The share capital of xY Ltd., consists of 10000 equity share of Rs.100 each, rs.50 pai(
and2500B%cumu|atiVepreferenceshareSofRS.100eachful|ypaid,
The balance sheet of XY Ltd shows assets (exclusive of goodwill) Rs.15,000000; liabilitier
Rs.400000, reserves Rs.350000 and paid up capital Rs.750000. The profits bqfore tax of X'
Ltd. for.the previous five years were Rs.100000, Rs.300000, Rs.5000; Rs.200000 ant
Rs.445000 Rate of tax is 50%.
thefe are noerlearr
. The assets and liabilities are accepted at balance sheetflgures and
of dividehds on preference shares, which in similar business yielcl a return oI b% unde
current market conditions. The.normal yield on capital employed in similar business is 10or
and goodwill is valued at five tlrnes the purchase price of the super profit.

You are asked to value the preference shares and the equity shares of XY Ltd.

Solution
Possible rate of dividend
Valuation of preference share =
Normal rateof dividend

= 9r-* roo = ur3r

6%
Calculation lf goodwill
Avcr:ne nrnfil of 4rrorr"=@
4

t045000
= zo rz50
4
Profit of 3'd year being abnormal not considered. lt was a smdll amount oJ, Rs.5000 8
it has been treated as abnormal.
/\.,^.^^^
nvsr 261,250 Rs. 261250
Pr vflr
ogs ^.^+i+
Lrr-D Lcr,\ (J U\., /O 130625 Rs. 130625
Rs. 130625

224
 Less normal return @ 10% on Rs' 1100000

Capital invested (i.e', 1500000 assets - Rs'400000 liabilltids) Rs' 110000

Super profit
Rs. 20625

Goodwi||=5yearspurchaseofsuperprofit=Rs'20625x5=Rs103125
Calculation of value of equity share

Assets excluding goodwill as per balance sheet Rs. 1500000

Add goodwill Rs. 103125

Rs. ',|603125

Less liabilities Rs. 400000

Rs. 1203125

Less Preference share'CaPita! Rs.250000

Assets available for equity sharetlolders Rs.953125

Number of equltY shares = 10000

Rs. 953125
Value of equity shares = -R;l6i1i' = KS' Yc''r I

EXERCISES

Essay type questions :

1'Eescribetwomethodsofsharesanddiscusswhichmethod,inyourviewismost
appropriate in valuing a minority and a majority holding'
purpose of
2. What are the factors that influence the valuation ofishares for the
'ama|gamationofcompanies?Discusswithi|lustratiQns'
and discuss the
3. Explain the circumstances under which valuation of shares is essential
various methods of valuation.
A
rndicate briefly the steps involved in valuing shares under each of ihe
following methods:

Earning basis (b),'net assets basis, (c) dual basis

indicate the
Critically examine the merits and demerits of the methods and al$o
circumstances of applicability of each method'

225
 5 Exprain wilh suitabre exampres the various
methods of varuation of equity shares. lVhic
will b6 an appropriate method and under what
situations ?
Practical problems :

1' (Net assets basis including goodwill)

From the foilowing information, find
out the valu
of each share :
BALANCE SHEET OF X LTD.

Liabilities
% Amount Assets Amount
Share capital : I-.
200000 rrxeo assets :
20000 equity shares of Rs. 10 each I 190000
Goodwitl
Reserves and surplus: I
250000 Investment current assels,
Reseryes 300000
Loans and advances :
Profit and less A/c
30000 {a) Current assets
Unsecured loans 50000
80000 (b) Loans & advances
Current liabilities 30000
20000 (c) misc. expenses 10000
580000
580000
For the purpose of varuation of shares goodwit
sha, be taken at two years purchase
y.ars, rnl profits for the rast five year are Rs.60,000,
::,?::H'T::j"*^":,T]1r:l*
Rs.70,000, Rs.40,000 Rs.50,000 and Rs.50,000 _
(Ans Rs,r9. 0).

2'(Net assets basis/yierd method) on

31"r March, 1gg., the barance sheet
company disclosed the following positiohs of a rimiled
:

Liabilities
Amouht Assets
lssued capital in Rs:i0 shares Amount
400000
Reserves 500000
90000
Profit and loss account 00000
20000
5% debentures 40000
'100000
Current liabilitids
130000 i

740000
740Q00
Ol J 998 the.fixed assets were independen'y
y:rch
^^^" -Ul: vatued at Rs.350000 un*
#"J:1,,x,^T'::,jgi;ly:lr::fns
97 Rs.52000, and 1997_98 Rs.Sl,650.
for the three yea,s where , 1 ,r5 _-;il;;";Jo, .r
nnu_

of which 200/o was placed to reserve this proportion

being considered reasonable in ine
in which the company is engaged
and where a fair investment return
|o,,11? may be tak;;

226
 Compuie the value of the company's shares by
(a)the assets melhods and (b)the yield method
Ans [(a) Rs.9.25; (b) Rs.10.35]
3. [Net assets basis/ yield method]
Mr. Ram Nath intends to invest Rs.66000 in equity shares of a limited company and
seeks your advice as to the maximum number of shares he can expect to acquire based on
(i) intrinsic value includlng goodwill
(ii) intrinsic value excluding goodwill and
(iii) yield basis.
Tne following information is available :

lssued and paid up capitral : 6% preference shares of Rs.100 each

1100000
Equity shqres of Rs,10 eaEh 700000
1800000
I Average net profit of the businesa ic Rs.1,50,000. Expected normal yield is B% ''in case
. of such equity shares. li is observed that net assets on revaluation are worth Rs.1,40,000
more than the amount of which they are gtated in the books. Goodwill is to be calculated at
5 years pqtehase of super profits, if any , lgnore taxation
Ans [(i) Nq of ghares to be purchased 5,000 on intrinsic value including goodwill.
(ii)No. of shares to be purchased 5,500 on intrinsic value excluding goodwill
(iii)On yield basis 4,400 sharesl
4. [Nel assets basis/yield method]
The following padiculars are available in relation to I Ltd:
(i) caBital :450 6% preference shares of Rs.100 each fully paid, and 4500 equity shares of
Rs.10 eaeh fully paid.
(ii) Reserved liabilities rs.7500
(iii) Reserves and surplus Rs.3500
(iv) The average expected proflt (after taxation) earned by lhe egmpany Rs.8500.
(v) The normal profit earned en the market value of equity shargs (fully paid) oi the same
time companies is 9olo
(vi) 10% of the profits after tax eaoh year are transferred le reserves.
Calculate the intrinsic value per equity share and the value per equity share according

227
 to dividend yield basis. Assume that out of total assets, assets worth Rs.350 are factious
value per share on dividend yield basir
[Ans: - Intrinsic value per equity share Rs.10.70:
r5.12.221

5. lYield method]
Mr. Ramson holds 12000 equity shares in Bharbt Ltd, the normal and paid up capital o
which consists of
(i) 40000 equity shares of Rs.1 each
(ii) 25000 8% preference shares of Rs.1 each

The preference shares do not participate in profits. lt is ascertained:

(a) The normal annuat net profits of such a company is rs.12000 and (b) the normal returt
by way of dividend on this paid up value of equity share capital for the type of busines
carried out by the company is 15%.
Mr. Ramson requires you to value the share holding based upon the above figures'

Ans. IRs.20,000].
6. [Net Assets basis method]
The following is the balance sheet of a company Ltd as on March 31 ,2005. Find out th
value of equiiy shares.

Liabilities Amount Ass-ets Amount

3000 equity shares of Rs.100 300000 Cash in hand
each Cash at bank 2000c
1500 8% preference shares of 150000 Sundry debtors 8000c
Rs.'1 00 each Stock-in-trade 14000t
General reserve 40000 Land and building 20500(
Profit and loss account 10000 Furniture 3000t
Bank loan 50000 Goodwill 7000(
Sundry creditors '15000 Discounts on shares 1800(

565000 5,65,00(

The value of assets is assessed as follows :

1. Furniture to be'depreciated at 10%

2. Value of stockf in trade, land and building and goodwill is estimated at rs.1,2000
Rs.250000, arid Rs.80000 respectively.
3. Debtors are expected to realize B0% of book value.

z26
 uNtT - lv
LESSON - 1

ACCOUNTING

Objectives
Tillnowwehavediscussedhowacompanyisformedandhowthefina|A/cofacompany
companies are amalgamated.and a
ls prepared. So in this lesson we will discuss how two
sheet'
*tp;"V is formed, What is reconstruction of a company and its new balance
""*
1. Meaning of Amalgamation

2. purchase6snsi(srqtion
reconstructiol'
Accounting Entries for Amalgamation Absorption and External

4. Mbaning of Reconstruction'

5. External reconstruction

Accounting Entries for external reconstruction .

7. Miscellaneous ExamPles

8. Review exercises

9. Prescribed books.
LESSON -2.

1.

z.

4.

7.

229
 ACCOUNTING FoR AMALGAMATIoN oF coJvIPANIEs

Lesson plan

ln this unit we wi| see how the corporate houses are nrerged
with each other and h(
a corporate house is re-organized;

.
1 Meaning of Amalgamation
2. Purchaseconsideration
3 Accounting entry for Amalgamation and External Reconstuction
4. Examples
5. Review exercises.
6. Prescribed books.

MEANTNG OF AMALGAMATION

Amargamation refers to combining of business of two

or more existing companiel
Accounting for amargamation is governed by AS-14
issued by the institute-of
accountants of rndia. This standbrd is mandatory in nature "r,urr"r"
and is appricabre for accountrn
period beginning on or after 1 .4.1gg5.

Amalgamation invorves at reast two existing companies

who Qgcide to brend the
business to avoid competition and enjoy economies of
scare. section ig+ ot tne companie
Act 1956 faciritates amargamation of cbmpanies by transfer
of property and riabirities to th,
transferee company as perthe orders of the court. Transferee
company m"un"tn";;",.
into wh'ch a transferor company is amargamated
and the transferor company means thr
company which is amargamated into another company.
Thus at reast tvvo u*
necessary for amalgamation. "on,.,pun,",
TYPES OF.AMALGAMATION

It may take prace in anyone of the fotowing two

ways as perAS-14 prescribed by ICAI
(i) A new company is formed to take over the
business of rwo or more existing companies
ln this case a, exiting companies .ose their identity
new company. lt may be cilled pure arialgamation.
and are known oy ti" n"r" oi.
(r/ une of the existing companies takes over (or absorbs)
the business of anotherexisnng
company. lt does not involve formation of a new
company. ln this case all, except one,
of the existing companies rose their identity and
are known by the name of the existing
company who takes over their business. This form
of amargamation is arso known as
Absorption.

z5u
RECONSTRUCTION
It refers to reorganization of an'over capitalized company with accumulated iosses but
whose future is very bright. In involves only one existing company as against amalgamation
which requires at leasitwo bxisiing companies. For this purpose, company makes compromtse
or arrangement with its creditors and members. Section 391 of the companies Act 1956
allows the companies to make compromise or arrangement with its creditors and_.members
provided, it is within the powers of ihe company as per its Articles of association and it is also
sanctioned by the Court of law.
RYPES OF RECONSTRUCTION
Reconstruction of a company may take place in one of the following two ways : -
1' -
External Reconstruction The exisiing company is liquidated and its business ts
taken over by a new company speciallyformed to takeover the business ofthe company
being reconstructed. This form of reconstruction is known as External Reconstruction.
It involves liquidation of existing company and formation of a new company.

2. Internal Reconstruction -Under this the exisiing iompany is reorganized by using

provisions relating io reduction of capital as contained in sections 100 to,105;f the
companies Act 1956. This form of reconstruction is known a$ lnternal Reconstruction :

and it involves less procedural formalities, as winding up of the existing company and
formation of a new company is not required.

Amalgamation (including absorption) and external reconstruction are although differ:ent

in nature but involve similar accounting treatment. These involve closing of books of the
transferor company which is being amalgamated/ absorbed/ reconstructed and recording of
entries on acquisition of business by the transferee company which may be one of the existing
companies (in case of absorption) or a new company (in casp of amalgamation and externar
.I EUvr
^^^-+r.,^+l^^\
rru uuu(Jr rr.

Purchase Consideration
Purchase consideration is the amount which is paid by the transferee company for the
purchase of the.business of the transferor company. In other words consideration for
amalgamation means the aggregate of the shares and othei securities issued and payment
in cash or other assets by the transferee company to the shareholders of the transferor
company. lt should not include the amount of liabilities taken over by the transferee company,
which will be paid directly by this company. payments made to debenture-holders should not-
be considered as part of purchase consideration. while deterinining the amount of purchase
consideration special care should be given to the valuation of assets and liabilities of the
transferor company. The calculation of purchase consideration is very important and may be
calculated in the following ways:

231
 (l) ' Lump Sum Method. When the transferee company agrees to pay a fixed sum to tt
transferor company, it is called a lump sum payment of purchase consideration. F
example, ifX Ltd. Purchases the business ofY Ltd. And agrees to pay Rs.25,00,000
all, it is an example of lump sum payment.

(ll) Net Worth (or Net Assets/ Mefhod. According to this method, the puiohase consideratic
is calculated by calculating the net worth of the assets taken over by the Transfere
company. The net worth is arrived at by adding the agreed value of assets taken ov{
by the transferee company minus agreed value of liabilities to be assumed bi tf
transferee company. While calculating purchase consideration under this method ti
following points merit attention :

a. The term 'Assets' will always include cash in hand and cash at bank unless otheruvis
specified but shall not in;lude factious assets as preliminary expenses, discount on ti
issue of shares or debentures, underwriting commission, debit balance of profit ar
loss account etc.

b. . lf a particular asset is not taken over by the transferee company, it should not be include
in the purchase consideration.

c. The term 'Liabilities' will mean all liabilities to third parties.(ie.. excluding company an
. shareholders).

d. The term 'trade liabilities' will include trade creditors and bills payable. lt will exclud
other liabilities to third party as bank overdraft, debentures, outstanding expenses, ta
liability etc.

e. lf a fund or portion of a fund denotes liability to third parties, the same must be include
in the liability as staff provident fund, workmen's savings bank account, workmen'
profit sharing fund, workmen's compensation fund iupto the amount of claim, if any).

f. The term liabilities'will not include'past accumulatbd profits or reseryes such as gener:
reserve, dividend equalization fund, reserve funds, sinking fund, capital reservel shar
. premium account, capital redemption ieserve account, profit and loss account etc. a
these are payable to shareholders and not to third parties.

g. The term 'business' will always mean both the assets and the liabilities:

h. lf any liability is not laken over by the transferee company, the same should not br
included in the purchase congiderglion.

i. Goodwilll (being an intangible assots value agreed to be paid by the transferee compan,
is added in the purchase consideration.

232
J. The consideration for the amalgamation should include any non-cash element at fair
valu<-:. ln case of issue of securities, the value fixed by the statutory authorities may be
taken to be the fair value. ln case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value of the
assets given up cannot be reliably assessed, such assets may be valued at their
respective net book values.

Where the scheme of the amalgamation provides for an adjustment to the consideration
contingent on one or more future events, the amount of the additional payment shouid
be included in the consideration if payment is probable and a reasonable estimate of
the amount can be made. In all other cases, the adjustment should be recognized as
soon as the amount is determinable [see Accounting Standard (AS)4, Contingencies
and Events Occurring After the Balance Sheet Datel.

Treatment of Reserves Specifed in a Scheme of Amalgamation. Where the scheme of

amalgamation sanctioned under a statue prescribes the keatment to be given to the
reserves of the transferor company after amalgamation, the same should be followed,
Calcrlaticn f lhe purchase consideration by the net worth method may. be made clear
by the follcwing example :

BALANCE SHEET OF A CO. LETD. as on ..............

Liabilities Rs. Assets Rs.

Share capital Goodwill 28.000
6.000 equity shares of Rs. 1n 60,000 Land and buildings 16,000
each
5% debentufes 10,000 Plant and Machinery 28,000
Sundry creditors 6.000 Stock 16,000
Generai reserve 4,000 Debtors 8.000
Profit and loss account 20,000 Cash 2,000
Freliminary expenses 2,000
1.00.000 1,00,000

Suppose (i) Company B iakes over the business of company A; (ii) The value agreed
forvarious absets is : Goodwill Rs.22,000, Land and Buildings rs.25,000, Plant and Machinery
Rs.24,000, Stock Rs. 13,,000 and Debtors Rs.8,000; (iii) B Company does not take over cash
but agrees to assume the liability of Sundry creditors at Rs,5,000.

The calculation of purchase consideration will be as folldws :

Value of assets taken over by B company : l,

233
 Rs,
22,O00
Goodwill
25,000
Land and buildings
24,000
Plant and machinery
13,000
8,000
92,000
e,,^^^,
| ^^^' \rur t^ken n\/er hv B cOmDanV 5,000
I LgJJ. rwr v nraditnrc
87,000
I Purchase consideration
is calculated by adding
(lll) Net Payment Method.underlhis method purchase consideration
thbVariouspaymentsintheformofshares,securities,cashetc'madebythetra,nsferee
company,Noamountof|iabilitiesisdeductedeveniftheseareasiumedbythe
'purc;hasingcompany.Thuspurchaseconsiderationisthetota|ofal|thepayments
(on page 3) B Co'
whether in shares, securities or cash. Suppose in the example given
Ltd. Also agrees to pay rs.15,000 cash to discharge the creditors'

The purchase oonsideration will be calculated as under:

Share-holders of A Co. qq.Wf!-Sg! Rs.
,IF

6,000 x *-- =9,000 shares of rs.10 each, Rs. B paid up

10
Cash paid to discharge crediiors 15,000
Purchase consideration 87,000
Thefo||owingpointsshouldbetakenintoaccountwhi|eca|culating purchase
consideration under this method :

(a) The assets and liabilities taken over by the transferee company are not to be considered

(b) Thepaymentsmadebythetransfereecompanyforshareho|ders'whetherincashol
shares must be taken into account.

(c) lf creditors and debentures are taken over by the transferee company and subsequentll
discharged then such amount should not be added to the purchase consideration.

(d) when liabilities are not taken over by the transferee company, they are neither adder
or deducted to the amount of purchase consideration

(e) Any payments made by the transferee company to some other party on behalf of thr
transferor company are to be ignored.

(f) lf the liquidation expenses of the transferor company are to be borne by the transferet
company, these should not be added to the purchase consideration'

234
 Under this consideration is required to bo
(lV) Shares Ex change Method' :t*n".d l:::"te
value of shares; The intrinsic value
of a share ts
calculated on the basis of intrinsic
by the number of
by divioing tne-nuiu""t' uu"itui'ie for equity shareholders
calculated between the
rfti'u'f'l i"itrmlnes tfre ratio of exchange of the shares
equity shares' of the shares of
unO t'un't"'oi **panies ln some cases the agreed valubs
transferee calculated
; ;; ln that case the purchase consideration is
both the companres X Ltd' And y
to the value of shares of two companies involved' Suppose
with reference capital is
on business in the same line of activiiy. Their
Ltd. are two
"orpuni""'Jurryingtuulue of each share' Rs'10)' The two companies decided
Rs.6,00'000 and n''Z'OO'OOO -ft-""tn
at Rs 15 and rs'25
share of X Ltd' And Y Ltd is vatued
to amalgamate it XV LtO'
be as
then purchase consideration will
respectively tor tne p'io"e of "matgumation'
, ndar '
r

X Ltd. Y Ltd.
Rs.

ffi
Rs.
9,00,000 5,00,000
5,00,000

Nofe:Whi|eissuingsharestoindividua|shareho|dersofthese||ingcompany,these
it can issue fractiona
may be in fractions. o.o'nouni-ttn;"i
;t:'" 1!ar3s in fractions but
for the fractions'
certificates or coupons or pay cash
: lt may take
lt means reconstruction of a company's , financial structure.
Reconstruction. going into
or without the liquidation of the company' lf the company
place either with
reconstructionis|iquidatedthenthereconstructioniscal|ed.as.externa|ieconstruction',thus are:
The two types of Reconstructions
otherwise it is called'lnternal Reconstruction"
with the 566s n666 in erdei
(i) External Reconstrucfion When a new company is formed
company, ii ib called external reconstruction'
to take over tne nusiness or an existing past losses' the
of a campany having accumulated
This is generally resorted to in case National Company
at their true value' For example'
book value of assets are not shown
Ltd. was taken over byi;; N";
National Co Ltd' Then the.former 9"T:1'^:l:" "
companvwill be a transferee companv'
;;;;;;;;;t*v uuing *o'na up and the latter
resorted to by a company which
is being
(ii) lnternal Reconstruqln' This is generally prepared in which all parties
A scheme of re-organization is
reorganized internally' preference
sacrifice. The sacritice u'" muCu in this order-equity shareholders'
this scheme
.r*,i"" and pariiafly s.cured oeditors. under
sharehorders, un"u"u*-o
its legal entity form and can
take advantage of carry
the existing .o'np'ny t*tinues in
This will be discussed in detail
in next ti.:.tl::
forward and ,"t of oJ ii" past loeses'
permitied to
of a special resolution of the company' the liquidator is
With the sanction

z5c
. ?t

accept shares and securities etc. of the transferee company for distribution among thr
members of the transferor company. Thus a company that goes into liquidation can br
purchased by some other company and the purchase price may be paid, fully or partly, b
issuing shares or securities in the purchasing company. The members of the transfero
company who do not like to purchase the shares of the transfefee company have the right a
requiring the liquidator to purchase thelr shares at a price 10 be determined by agreement o
in default by arbitration.

From the above discussion it is clearthatthere are two types of companies i.e. transfere(
company and the transferor company companies in case of amalgamation, and externe
reconstruction; so accounting entries which are to be passed in the books of transferer
company and transferor company/ companies will be the same in case of amalganiation an(
external reconstruction.

AMALGAMATION AND EXTERNAL RECONSTRUGTION

Accounting Entries in the Books of the Transferor Gompany

The books of the transferor company being wound up will be closed in the same as tnt
books of a partnership firm being dissolved. The following entries are made :

(1 ) For transferring assets taken over by the transferee company.

Realization Account Dr.

To Various Assets (individually) (at book value)

Note. Assets which are not taken over by the purchasing company as cash, bank balancr
will not be transferred to.Realization Account. Fictitious asseis like preliminary expenses
discount or commission or expenses on issue of shares or debentures, debit balance o
profit and loss account are not to be transferred to realization account. Assets on whicl
some provision has been made are to be transferred to realization account at their grosr
figures and provisions made should be kansfened along with liabilities.

(2) For transfering liabilities taken over by the transi;feree company

Various Liabilities (lndividually) Dr. (at book value)
To Realization Account

Note. Only those liabilities are to be transferred which have been assumed by the transfere(
company. Accumulated profits like credit balance of profit and loss account, general reserve
dividend equalization reserve, sinking fund, capital reserve are not transferred to realizatior
account. lf there is any fund which partially represents liability and pariially undistributec
profit, then that portion which represents liability should be transferred to realization account

236
 Dr.

(6)

Dr'.

Dr.

t'l.

over by the transferee company when paid by the transferor

Realization A/c (tf

Dr. To Bank Account

237
 or Shares in Transferee Co. AJc

To Realization Account (if less payment is made)

(8) For Closing Realization Account

(a) lf Profit

Realization AJc Dr.

To EqlitY Shareholders A,/c

(b )/f Loss

EquitY Shareholders A,/c Dr.

To Realization A'/c

(g) For transfeling Preferences Share Capital

Preference Share CaPital A,/c Dr.

To Preference Shareholders AJc

Note. lf arrears of dividend are to be paid to preference shareholders, then such exces
amount should be debited to realization account and credited to Preference Shareholder
Account. lf the preference shareholders have agree! to get less than the amount of capitu
then reverse entry is to be Passed'

(10) For fransfe rring equity share capital and accumulated profit:

Equity Share CaPital A'/c Dr.

General Reserve fuc Dr.

Debenture Redemption Fund Dr.

Dividend Equalization Reserve Dr.

Securities premium.A/c Dr.

Profit & Loss A'/c Dr.

Accident compensation Fund Dr.

(to the extent it does not denote liability)

Shares Forfeited FJc Dr.

Profit Prior to incorPoration

238
 Any Olher Reserve or Fund AJc Dr'

. To Equity shareholders fuc

(11) For transfen'in!] accumulated Josses and expenses not written'off

Equity Sharehoiders rVc Dr'

To Profit & Lcss A/c (Debit Balance)

To Discount or Expenses on lssues of Shares or debentures

To PreliminarY expenses

To Underwriting Commission

(12) For paying shAreholders

l/c
Preference Shareholders Dr'

Equity ShareholCers AJc Dr'

To Bank or Shares in Transferee Company

Accounting in the books of the Transteree Company

Accounting in the books of the transferee company is to be done with reference to

Accounting standard (AS)-14. The accounting procedure will differ depending upon the type
of amalgamation. There are two main methods of accounting for amalgamation in the books
of the transferee company :

(a) The Pooling of lnterests Method, and

(b) The Purchasing Method.

{a) The Pooling of Interests Method'

This method is applicable in case of amalgdmation in the nature of merger. In this case,
the amalgamation is accounted for as if separate businesses of amalgamated companies
were intended to be cai'ried on by thq transferee company. That is why only minimum changes
are made in aggregating the individual financial statements of the transferor companies. The
iollowing factors are taken into consideration while making entries in ihis method :

(i) ln preparing the transferee company's financial statements, ihe assets, liabilities, and
reserves (whelher capltal or revenue or arising on revaluation) ofthe transferor company
should be recorded at their existing carrying amounts and in the same form as at the
date of the amalgamation unless any adjustment is required due to ditferent accounting

239
 policies. The baiance of ihe Proflt and Loss Account of the transferor company sho
be transferred to the General Reserve, if any.

(ii) The difference between the amount recorded as share capital issued (plus any additio
consideration in the form of cash or other assets) and the amount of share capital of
transferor company should be adjusted in reserves. ln case there is no balance in
Reserye Account in the Balance sheet of fhe transferee company to offset the dt
balance,in the reserve Account arising as a result of the difference between the purchi
consideration and the amaunt cf share capttal of the transferor company should
debited to Profit an,l Loss Account instead bf debiting Reserue Account. lt is so becal
Reserve Account is never shointn as a debit halance'

(iii) lf, at the time cf amalgamation, the transferor and the transferee companies hi
conflicting accounting policies, a uniform set of accounting policies should be adop
following the amalgamation. The effects on the financial statements of any changer
accounting policie:'.should be reported in accordance with Accounting Standard (A
5, 'Prior Period and Extraordinary ltems and Changes in Accounting Policies.

The following journai eniries are to be passed in ihe books of the transferee compi
for incorporating the firrancial statements of the transferor company.

(1 ) On amalgamation of busrness

Busrness Purcnase,q,/c Dr. (with the amount of

To Liquidators of the Transferor Co. purchase consideration)

(2) For recording assets and liabilities taken over

Sundry assets (individually) with book value

To Sundry Liabilities (lndividually) (With bodk value)

To reserve A/c

To Business Purchase A/c

The difference between debits and credits is adjusted in the reserves of the transf€
company.

Note. As per para 33 of AS-14, the balance of the Profit and Loss A,/c of the transfl
Company in transferred to General reserve, if any.

(3) For making payment to the liquidator of the transforor company.

Liquidators of the Transferor Co AJc

To Bank/ Share Capital/ Securities Premium (if any)

240
(4) lf liquidatian expenses are paid by the transferee company
General reserve or Profit & Loss l'/c Dr'

lf there is no General Reserve

To Bank AJc

(5) For the formation expenses of the transferee company

Preliminary Expenses A'/c Dr.

IO BANK A/C

lllustration - 1

A Ltd. and B Ltd. rryere amalgamaied on and from 1"rApril, 1999. A new company AB
Ltd. was formed to take over the business of existing companies. The balance sheets of A
Ltd. and B Ltd. as on 31"rMarch, 1999 are given below:
(figures in thousands)
A Ltd. B Ltd. A Ltd. B Ltd.
Share Capital Fixed Assets 4,800 3,200
Equitv shares of Rs.10 each 2.400 1,600 Less : Depn. 800 600
12% preference shares of Rs. 100 1,200 800 4,000 2,600
each
Reserve and Surplus : lnvestments 1,600 600
Capital Reserve 800 600 Current Assets :
General Reserve 1,200 600 Stock 1,200 600
Profit and loss AJc 400 200 Debtors 1,600 800
Secured loans 1,600 800 Cash &
Bank '1,200 600
Balance
Trade Creditors 1,200 400
Tax provision 800 200
9,600 5,200 9,600 5,200

Other lnformation :

(i) Preference shareholders of the two companies are lssueo equlvalent number of
150/o preference shares ofAB Ltd. at an issue price of Rs'125 per share'

(ii) AB Ltd. will issue one equity share of Rs,10 each for every share of A Ltd. and B
Ltd. the shares are issued at a ptemium of Rs.S per share. Prepare the balance
sheet of AB Ltd. on the assumption that the amalgamation is in the nature of
merger.

Solution

241
(1) CALCULATTON OF pURCHASE CONSTDERATTON
A Ltd, B Ltd.
Rs,'000 Rs.'000
(a) Preference shareholders 12,000 shares at Rs.125 €ach 1500
8.00 shares at Rs.125 each
1000
(b) Equity Shareholders 2,40,000 shares of rs.1 5 each 3600 2400
1 ,60,000 shares of rs.15 each

Total Purchase Consideration 5100 3400

(2) AMOUNTTO BEADJUSTEDAGATNSTTHE RESERVES
A Ltd. B Ltd.
Share capital of transferor companies Rs.'000 Rs.'00
Equity share capital 2,400 1,60
Preference share caoital 1,200 80
3,600 2.40
Purchase consideration (as per working (i)l 5,1 00 3,40
Difference to be adjusted against reserves 1,500 1.00
The total difference of rs.25,00,000 should be adjusted in the balance sheet ofAB
Ltd. against resdrves as shown below :
A Ltd. I Ltd. Total Ad justment Balanc
Capital reserve 800 600 1.400 1,400 Ni
General Reserve 1.200 600 1,800 1 ,'t 00 70
2,000 1,200 3,200 2,500 70
.A,B Ltd.
BALANCE SHEET as on 1 .4.1999
Liabilities Rs. Assets Rs.
(in'000) '000)
Share capital : Fixed assets : 8,000
20,000 Pref. sharei of Rs.100 each 2,000 Less : depreciation 1,400
4,00.000 .Equity shares of rs.10 4,000 6,600
each
Reserves & Surplus : Investments 2.200
Share premium 2,500 Current assets
[25 x 20000 + 5x400000 = 2500000
General Reserve 700 Stock 1,800
Profit and Loss A,/c 600 Debtors 2,444
Secured loans 2.400 Cash & Bank balances 1.800
Trade creditors 1,600
Tax provision 1,000
14,800 14,800

242
 (b) Purchase Method

This rnethod of accounting is applicable for amalgamation in the nature of purchase.

The folior,ving factors should be considered while making accounting entries.under this method:

(i) In preparing the lransferee compahy's financial statements, the assets and liabilities of
the transferor conlpany should be incorporated at their existing carrying amounts or,
alternatively, the consideration should be allocated to individual identifiable asiets and
liabilities on the basis of their fair values at the date of amalgamation.

(ii) The reserves (whether capitai or revenue or arising on revaluation) of the transferor
company, olher lhan the statutory reseryes, should nol be included in tre financlal
statements of the transferee company.

(iii) An excess of the amount of the consideration over tne net assets of the transferor
company acquired by the transferee company should be recognized in the transferee
company's financial statements as goodwill arising on amalgamation. lf the amount of
the consideration is lower than the value of lhe net assets acquired, the difference
should be treated as Capilal reserve.

(iv) The goodwill arising on amalgamation should be amortized to income on a systematic

basis over tits useful life. The amortizalion period should not exceed five years unless
a somewhat longer period can be justified.

(v) where the requirements of the retevanl statute for recording the statutory reseryes
such as Development Allowance Reserve, Investment Allowance reserve
etc. in the
books of the transferee company are complied with, statutory reserves
of the transferor
company should be r6corded in the financial stiatements of ihe hansferee
company oy
debiting'Amalgamation Adjustment Account'.
(vi) The Amalgamation AdjustmentAccount should be disclosed as part
a of
,,miscellansous
expenditure" or other similar category in the balance sheet. when the
identity of the
statufory reserves is no longer requhed to be maintained, both the reserves
and aforesaid
account should be reversed.

The folrowing journar entries are passed in the books of transferee

company for
incorporation of the financial statement of the transferor company
:

(1) For purchase of busrness from the Transferor Company :

Business Purchase A,/c Dr. (For Purchase considerationt

To Liquidator of the Transferor Company

243
 (?) For recording assets and tiabilitles taken over
Various Assets fuc Dr.
(at revised values if any, otherwjse at book values)
To various Liabiiities (with the figures at which they
are iaKen over)
To Business purchase A,/c

lf (1) and (2) are combined, then the following one

entry can also be passed :

Various asseis Alc

(at revised values if any, otherwise at book
values)
To Various Llabilities A/c (with,the figures
at which they are taken over)
To Business Purchase A/c

Note. (i)if credit is more than debit, the difference

is debited to Goodv/i, Accouni.
(ii)if debit is more than credit, the difference
is credited to capitar Reserve Acco'
(3) For making payment to the liquidator of
vendor companv :
Liquidator of the transferor Company 'he
Dr.
To Bank A/c

To Share Capital A/c

To Share premium A,/c (if any)

(4) When statutory reserve ls maintained

Amalgamation adjustment A/c Dr.
To Statutory Reserves A,/c

(5) lf liquidation expenses are paid by the

transfdree company :
Goodwill A,/c
Dr.
To Bank
(6) For formation expenses of the trasnsferee company if any
Preliminary Expenses fuc
To Bank

Less :Adjusted in reserye Fund and profit

loss A,/c Batance of ,{ Ltd. and B Ltd.
1,50,000
Reserve Fund and profit and Lossfuc
to be shown in B/ S of AB Ltd. til

244

t
lllustration - 3

A Ltd. acquired the undertaking of B Ltd. on 31.3.1999 for a purchase consideratioftof

Rs.2.50,00,000 to be paid by fully paid equity shares of Rs.10 each. The Balance Sheet$of
the two companies on the date of acquisition were as follows :

A Ltd. B Ltd. A Ltd. B Ltd.

Share Capital Rs. Rs. Fixed Rs. Rs..

assets
Equity shares of 2,50,00,000 1,50,00,000 Land & 1;20,00,000 80,00,000
Rs.1 0 each fully buildings
:
paid up
Reserves & Plani & 2,00,00,000 1 An nntu

Surplus Machinery
General reserve 1,20,00,000 '18,00,000 Furniture & 10,00,000 20,00,000
fixtures
Profit & loss A/c 10,00,000 53,00,000 Current
assets
Development 10,00,000 37,00,000 Stock 55,00,000 40,00,000
rebate reserve
Workers' 15,00,000 24,00,000 Debtors 45,00,000 40,00,000
compensation
fund
Current liabilities 45.00.000 95,00,000 20,00,000 17.00.000
4,50,00,000 3,77,00.000 4,50,00,000 3,77,00,000

Pass the necessary journal entries in the books of A Ltd. when amalgamation is in the
nature of (i) merger and (ii) by way of purchase. Also prepare the Balance Sheet of A Ltd.
after amalgamation assumihg that Development Rebate Reserve and Workers' Compensation
Fund of B Ltd. are required to be continued in the books ofA Ltd.

Solution

\i)When Amalgamdtion is in the Nature of Merger

Books of A Ltd.

JOURNAL ENTRIES

245
q Ir.,-! t

Rs. Rs.
Business purchase AJc Dr. 2,50,00,000
: To llquidators of B Ltd.
(being purchase of business of B Ltd.)
Lano & buildings A/c Dr. 80,00,000
Plant & machinery AJc ut. 1,80,000
Furnilure & fixtures A/c Dr. 20,00,000
Stock A/c Dr. 40,00,000
Debtors fuc Dr. 40,00,000
Bank A/c Dr. 17,00,000
General reserve AJc (balancing flgure) Dr. 29,00,000
To current liabilities 95,00.000
To development rebate reserve A,/c 37.00.000
To workers' compensation fund AJc 24.00.000
To business plrchase Alc (being merger of assets, 2,00,000
liabilities and reserves of B Ltd. with A Ltd. and
difference transferred to General Reserve fuc)
I irt,rid::r^rc El I f^
^f Dr. 2,50,000
To equity share capital A,,/c 2,50,00,00(
(being payment of purchase price by issue or
2q,00,000 equity shares of rs.10 each

BALANCE SHEET OF A LTD. (AfterAmatgamation) as on 31.3.1999

Liabilities Rs. Assets Rs.

Share Capital 50,00,000 equity shares of 5,00,00,000 Fixed assets
Rs.l0 each, fully paid up (of the above
25,00,000 shares of Rs.10 each issued for
purchase o1 business of B Ltd.
Reserves & Surplus Land & 2,00,00,00
Buiidings
General reserve 91,00,000 Plani & 5sc^oopo
macnrnery
Profit & loss A/c 10,00,000 Furniture & 30,00,000
fixtures
Development rebate reserve 47,00,000 Current

Workers compensation fund 39,00,000 Stock 95,'00,.000

Current liabilities 1,40,00,000 Debtors 85,00,000
Bank 37.00,000
0alance
8,27,00,000 827J0.0O

246
 (iilWhen Amalgamation is by way of purchase

JOURNAL ENTRIES

Rs. Rs.
Bu sirress purchase Alc 2,50,00,000
To liquidators of B Ltd.
(beirig purchase of business oI B Ltd. 2,50,00,000
Laod & Buildinqs Aic l)r 80,00.000
r rdl I I O( lvlaCnlnefv A./C
r!rntrure & Itxtures A/c 1,80,00,000
0r. 20,00,000
S tock A/c
40,00,000
lJepiors Alc Dr. 40,00,000
r
l-l 17,00,000
To current liabilities
To business ptrchase 95,00,000
2,50,00,000
To cepital.reserve nlc@ 32,00,000
and lia bilities taken over)
Dr. 2,50,00,000
To €quity .share capital A/c (being payment of
purolrase pfice 2,50,00,000
by issue of 25,00,000 sharej of Rs.10
each)
;-h
ffi ervyl| |lrt ||, tcr.)ate reserve A/c
Dr. 61,00,000
37.00,000
Io/'/oikers'co@ 24.00,000
forward of reserves of B Ltd.)
BALANCE SHEET OF B LTD (AflerAmatgamation) as
on 31.3.1999

Share Capitat SO,OO,OOO equi$ straG 00,00,000 Fixed assets

of Rs.10 each, fully paid up (of the Land & Buildings
above 25,00,000 shares of Rs.1d each
,
2,00,00,000
Plant & machinery 3,80,00,000
issued for purchase of business).
Furniture & fixlures 30,00,000
Reserves & Surplus
Cuirent assets 95,00,000
Capital reserve
Stobk 85,00.000
General reserve
Debtors 37,00,000
Profit & Loss A/c 32,00,000 Bank balance
Development rebate reserve 1,20,00,000 Miscellaneous
Workers compensation fund 10,00,000 expenditure (to the
Curent liabilities 47,00,000 extent not written off
39,00,000 or adjusted)
1,40,00,000 Amalgamation
adjustment A,/c

247
 lllustration - 4.

A Ltd. and B Ltd. agreed to amalgamate by transferring their undertakings to a r

company, AB Ltd., formed for that purpose. On the date of the amalgamation Balance She
of the companies were as under.

Liabilities A ltd. B Ltd. Assets A Ltd. B Ltd.

Rs. Rs. Rs.
Authorized and issued Sundry 4,80,000 3,22,000
capital assets
Equity shares of 5,00,000 3,00,000 Freehold 2,00,000 1,00,000
Rs.1 0 each propertv
5% debentures 2,00,000 1,00,000 Investments 50,000 000
Reserve fund 50,000 Debtors 2,50;000 1.50.000
Profit & loss A/c 30,000 20,000 Preliminary 20,000 8,000
expenses
Modgage ' loan 50,000
secured on freehold
property
Sundry creditors 2,20,000 1,30,000
10,00,000 6,00,000 10,00,000 0,00,000
The purchase consideration consisted of:

(a) the assumption of the liabilities of both companies ; and

(b) the issue of shares at a premium of Rs.2 per share of equity shares of
Rs..l 0 each
AB Ltd.

For the purpose of the amargamation, the assets are to be revarued as under :

A Ltd. Rs. B LId, RS.

Goodwill 1,00,000 75,000
.Sundry assets 4,1 0,000 2,80,000
Freehold property ?,60,Q00 1,40,000
Investments 51,000 20,000
Debtors 2,25,400 1,35,000

Journalize the above transaction in the books ofA Ltd., B Ltd., and AB Ltd. Indicate
basis on which the shares in AB Ltd. will be distributed among the shareholders
of A Ltd. ar
B Ltd. respectively.

Solution

As per accounting standard i4, amargamation is not in the nature of merger but it is

248
 .!
the nature of purchase because assets of the transferor companies A Ltd. and B Ltd, have
not been taken over by the transferee company at their existing valtes.

CALCULATION OF PURCHASE CONSIDERATION

A Ltd. B Ltd.
Rs. Rs. Rs. Rs.

Assets taken over

Goodwill 1,00,000 75,000
Sundry Assets 4.10.000 2,80,000
Freehold propertv 2,60.000 1,40,000
lnvestments 51,000 20,000
Debtors 2,2s,000 !i,es,ooo
10,46,000 6.50.000
Less : liabilities taken over
5Yo debentures 2;00;000 1,00,000
Mortqage loan 50.000
Sundrv creditors 2,20,000 1.30,000
4,70,000 2,30.000
5,76,000 4,20,000

Rs. 5,76,000 Rs.4,20,000

4,20.000
--.-1;-
ryq = 4e,ooo tz = 4U'UUU

249
JOURNAL ENTERIES IN THE BOOKS OF A LTD
Rs. Rs.
Realization Account Dr. 9;80,000
To Sundry assets account 4,80,000
To ireehold property accouni 2,00,000
To investments account 50,000
To debtors account 2,50,000
(Being assets taken over by AB Ltd. transferred to
Leq!4elio rl account)
Mortgage Loan account Dr. 'so,ooo
Sundry Creditors account Dr. 2,20,000
5% debentures account .
2,00,000
To realization account 4,70,00c
(Being liabilities taken over by AB Ltd. transferred to
rA^li7^li^n r^^^rrnt\

AB LId, 5,76,000
To Realization account 5,76,000
(Being purchase consideration agreed to be paid by AB
Ltd )
Equity shares in AB Ltd. 5,76,000
To AB L-td. 5,76,000
(Being the receipt of the purchase price)

Realization Account 66,000

To shareholdefs Account 66,000
(Belng profit on realization transfened)

Shareholders account
To preliminary expenses account 20,000
(Being transfer of preliminary expenses)

Equity share capital account 5,00,000

Profit and loss account 30,000 5,30,000
To equity shareholders accouni
(Being balances transfered to equity shareholders)

Equity shareholders accouni 5,76,000

To equity shares in AB Ltd. 5,76,000
(Being payment made to equity shareholders)
JOURNAL ENTRIES BOOKS OF B LTD

Rs. Rs.
Realizatioh Account Dr. 5,92,000
To Sundry assets accoutlt 3,22,000
To freehold property 1,00,000
To investments 20,009
To deblors 1,50,O00
(Being assets taken over by AB Ltd. transferred
to realization account)
Sundry Creditors account .., 1,30,000
5% debentures account 1,00,000
To realization account 2,30,000
(8eing credilors taken over by AB Ltd. transferred
lo realizatibn account)

AB Ltd. Dr.
To Realieation account 4,20,000
(Being purchase consideration payable by AB 4,20,000
Ltd.)
Equity shares in AB Ltd. Dr.
To AB Ltd. 4,20,000
( Being purchase consideration received) 4,20,000

Flr
Realization Account
To shareholders Accounl 58,000
(Being iransfer of profit on realization) 58,000

Fquity Shareholders account Dr.

To preliminary expenses account 8,000
(Being transfer of preliminary expenses) 8,000

Equity shareholders account Dr. 3,00,000

Reserve fund Dr. 50,000
Profit and loss account Dt. 20,000
To equity shareholders accouts 3,70,000
(Being balances . transferred. to equity
shareholders)
JOURNAL ENTRIES IN THE BOOKS OF AB LTD

Business purchase account

Dr. RS.
To liquidators of A Ltd.
5,76,000
(Being the purchase price payable on the purchase of
5,76,000
the business of A Ltd.
Goodwill Account
Sundry Assets account Dr. 1,00,000
Freehold property account Dr. 4,10,000
Investment account Dr. 2,60,000
Debtors Account Dr. 51,000
To Mortgage loan account Dr. 2,25,000
To Sundry creditors account
50,000
5Yo debentures accounl
2,20,000
To business purchase account
2,00,000
(Being assets and liabilities taken over)
5,76,000
Liquidators ofA Ltd.
To Equity share capital account
5,76,000
To securities premium accounL
(being issue of 48,000 equity share of Rs. .10
each at a
premium of rs.2 per share in setflement of the
purcnase price)

Business purchase account

To liquidators of B Ltd.
(being purchase price payable to the liquidators of B 4,20,000
Lro. ror trte purchase of the business of B Ltd. 4,20,000

Y CO. LTD.

CASHACCOUNT

To y Co.Ltd. By Sundry creditors account

By bank overdraft account
By Realization account

252
 SHARES IN Y CO. LTD
To Y Co. Ltd. Rs. By shareholders Account Rs.
90,000 1,20,000
SHAREHOLDERS ACCOUNT
To realization account (loss) Rs. Rs.
To profit and loss account 29,000 By share capital account 1,20,000
To shares in Y co. Ltd. 1,000
90,000
1,20.000 1,20,000
JOURNAL ENTRIES IN THE BOOKS OF Y CO.LTD.
Business purchase account Dr. Rs. Rs.
To Liquidators of X Co. Ltd. 1,50,000 1,50,000
(Being purchase consideration agreed to be paid to the
liSUqglgrs oJ X co. Ltd.)
account
Land and Buildings D. 90,000
account
Machinery Dr. 50,000
Stock account Dr., 17,000
Sundry deMors Dr. 20,000
To busines$ purchase account 't,50,000
To capital reserve account 27,000
(Being various. assdts taken over at book value and the
excess of value of assets over purchase price credited to
capital regerve account being capital profit)
Liquidators of X Co.Ltd. Dr.
To share capiial account 1,5.,,000
To cash account 90,000
(Being issue of 12,000 shares of Rs.10 each, Rs.7.b0 paid 60,000
up and Rs.60,000 cash paid to the liquidators of X Ltd. in
settlelrent of the purchase price)
lllustration - 6
x Ltd. and Y Ltd. are two companies carrying on business in the same line of activrty-
Their balance sheets as on 31.3.99 are given below :
Fully paid up equity X Ltd. Y Ltd. Land & buildings X Ltd, Y Ltd.
Shares of Rs.10 each KS-. Rs. Plant & Machinery '
Rs, Rs;
General reserves 6,00,000 2,00,000 Investments 1,00,000
Secured Lobn 4,00,000 2,00,000 Stock 7,00,000 3,00,000
Current liabilities 6,00,000 1,00,000 Debtors 1,00,000
6,00,000 4,00,000 Cash at bank 9,00,000 4,00,000
22,00;000 9,00,000 3,00,000 1,00,000
1,00,000 1,00,000
22,00,000 9,00,00
The two companies decide to amalgamate in ihe nature of purchase into:Xy ttd. The
following further information is given :

253
(1) X Ltd, holds 8,000 shares in Y Ltd. @ rs.12.50 each.
(2) All assets and liabilities of the two companies, except investments are taken over b,
Ltd.
(3) Each share in Y Ltd. is valued @ Rs.25 for the purpose of amalgamation.
(4) Shareholders in X Ltd. and Y Ltd. are paid off by issuing to them Sufficient numbr
equity shares of Rs.10 each in XY Ltd. as fully paid up at par.
(5) Each share in X Ltd. is valued @ Rs.15 for the purpose of the amalgamation.
Show journal entries to close the books of both the companies.
Solution
JOURNAL (X LTD.)
Realization Alc Dr. Rs.
To land & buildings Alc 21,00 000
To plant and machinery A/c 1,00,(
To stock A/c 7,00,(
To debtors A/c 9,00,(
fo cash at ba nk 3,00,r
(Be,ng assets taken over by XY Ltd. transferred to Realization 1,00,(
Account)
Secured loan A/c Dr. 6,00,000
Current liabilities A/c Dr, 6,00,000 1 2,00,(
To realization A/c
(Being the liabilities taken over by XY 10
Realization Account)
XY LId. Dr. 9,00;000
To realization A/c 9,00;c
(tseing purchase consideration agreed to be paid by Xy Ltd.)

Shares in XY Ltd. Dr.

To investment A/c 2,00,000
To su nd ry shareholders A/c 1,00,c
(Being the receipt of shares in XY Ltd. on liquidation of Y Ltd. 1,00,c
and profit transferred to gundry shareholders Alc)
Shares in XY Ltd. A/c ur.
To XY Ltd.
(By the receipt of shares from XY Ltd. on account of purchase 9,00,000
consideration ) 9,00,0

Share capital A/c Dr.

General reserve A/c r\.
To su ndry shareholders A/c 6,00,000
(Being the transfer of share capital and general reserve IO 4,00,000
sun d ry shareholders account) 10,00,0
Sundry Shareholders A/c Dr.
To shares in XY Ltd. A/c
(Being the distribution of shares In XY Ltd. among the
sha reholders) 11,00,000
11.00.0

254
 JOURNAL (Y LTD)

Rs. Rs.
Realization A,/c Dr. 9,00,000 3,00,000
To plant & machinery A/c 4,00,000
To Stock A,/c 1,00,000
To Debtors A/c 1,00,000
To Cash AJc
(Being the assets taken over by XY Ltd. transferred to realization
account)
'1,00,000
Secured Loan A,/c Dr.
Current liabilities A,/c Dr. 4,00,000
To realization A/c 5,00,000
(Being the liabilities taken over by XY Ltd. transferrpd to
realization account)
XY Ltd. Dr. ' 5;00,000
To realization A,/c 5,00,000
(Being purchase consideration aqreed to oe paid by XY Ltc.)
Share capital AJc
General Reserve A,/c 2,00,000
Realization A/c Dr. 2,00,000
To sundry shareholders Aic 1,00,000
(Being the share capital, general reserve and profit on realization 5,00r000
transferred to sundry shareholders account)
Shares in XY Ltd. A/c Dr.
To XY Ltd.
(Being the receipt of shares from XY Ltd. on account of purchase 5,00,000
consideration) 5,00,000
Sundry shareholders A,,/c Dr.
To shares in XY Ltd.
(Being the receipt of share from XY lid. on account of purchase 5,00,000
consideration) 5,00,000

Note
X Ltd Rs. Y Ltd. Rs.
Amount of purchase consideration
60,000 shares @ rs.15 per share 9,00,000
20,000 shares @ Rs.25 per share 5.00,000

lllustration - 7

A Ltd. and B Ltd. were amalgamated on and from 1"rApril, 1999. A new company C
Ltd. was formed to take over the business ofthe existing companies. The Balance Sheets of
a Ltd.-and B Ltd. as on 31"rMarch, 1999 are given below:

255
 Liabiiities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share capital of Rs. 100 each 800 750 Fixed assets 550 400
Land & building
12o/o preference shares of Rs. 300 240 Plant & Machinery JCU 25C
100 each
Reserves and surplus : Investments 150 5C
Revaluation reserve 150 100 l-oans and advances

General reserve 170 150 Stock 350 25C

Investment allowance reserye 50 Sundry debtors zcu 300
P & L Account AN 1n Bills receivable 50 50
Secured loans 105 debentures 60 Cash and bank 300 200
(Rs. 100 each)
Current liabilities and
provisions
Sundry creditors 270 120
Bills payable 150
2,000 1,500 2,000 1.501]

Additional Informations

i1)10% Debentureholders of ALtd. and B Ltd. are discharged by c Ltd. issuing suc
number of its is% debenturel of rs.100 each so as to maintain the same amount c
interest.

(2) Preference shareholders of the two companies are issued equivalent

number of 15oz
preference shares of c Ltd. at a price of rs.150 per share (face
varue rs.100).

(3) c Ltd. will issue 5 equity shares for each equiiy share of A Ltd. and 4 equity
shares fo
each equity share of B Ltd. the shares are to be issued
@ rs.30 each, having a facr
value of Rs. 10 per share.

(4) Investment allowance reserve is to be maintained for 4 more years.

Prepare the Balance sheet of c Ltd. as on 1s' Aprir, 1 gg9 after the amargamation
has
been carried out on the basis of amargamation in the nature of purchase.

Solution

(1) Calculation of Purchase Consideration

zco
 ''l

1Pc ln lr lzhc \
A Ltd. B Ltd.
Preference shareholders to ge! l\ok Pref. shares :

S#P# i.e., 3,00,000 shares @ Rs. 150 each 454

1?.s.3,00,00,000
i.e., 2,00,000 shares @ Rs. '150 each
R.s. 100
Equity shareho,ders to get equity shares
r?.r.8,00.00,000 1,200
x 5 i.e.,40,00,000 shares @ Rs. 30
1ls. i00
1l.r'.7"50,00;000 900
x 4 i.e., 30,00,000 shares @ Rs. 30
l?.s.100
Amount of purchases considErqtlqn (LEIFIFfl 1,650 1,204
(2) y'lel Assefs Taken Over
(Rs. In lakhs)
A Ltd. B Lid. Total
Lan4 and Building 550 400 950
Plant and Mqclinery 350 254 600
Investments 150 50 200
Stock 350 250 600
Sundry debtors 250 300 550
Bills receivable 50 100
Cash and Bank 300 200 500
Total assets 2,000 1,500 3,500
Less : liabilities taken over .. debentures (40) (20) (60)
9all debentures are not taken oGibeczuG takinfl ')
,"^-2',
over of
1
a
of 10% debentures will be able to get ' x:3')
f60 ' 3'.

same amount of interest by issuing 15%

debentures)
Sundry creditors (270\ {124\ {3900
Rillc n=rrrhla (150) (70) (220\
Net assets taken over 1540 1290 2830
Less : purchase consideration 1650 1200 2850
110 90 2A
(Goodwill (Capital (Goodwill)
Reserve)

(3) As it is given that investment allowance reserve is to be maintained for 4 more years,
it should be carried forward by a corresponding debit to amalgamation adjustment
account in
accordance with accounting standard 14.

257
BALANCE SHEET OF C Ltd. as on 1"rApril, 1999
(A!l figures in Rs Lakhs
Liabilities Assets
Share capital Fixed Assels
70,00,000 equity shares of Rs.10 each Goodwill 20
5,00,000 15% preference shares of 700 Land and Buildrng 950
Rs.1 00 each Plant and Machinery 600
(All the above shares are allotted as 500 Investments'- 240
fully paid up pursuant to contracls (A)Current Assets
without payment being received in Stock 600
casn) Sundry Debtors 550
Reserve and surplus Cash and Sank 500
Shares premium account
(On 5,00,000 preference shares @ Rs. (B) Loans and Advances
50 each + On 70,00,000 1650 Bills Receivable
Equity shares @ Rs.20 each) Miscellaneous expenditure 100
lnvestment allowance reserve (to lhe extent not written off or
Secured loans adjusted)
15% debentures Amalgamation adjustment
Unsecured loans Account
(A)Current liabilities 100 100
Bills payable
Sundry creditors
(B) Provisions 60
Nil

220
390
Nil
2.620 3,620
lllustration - 8

The balance sheets as on 31"i March, 1999 oi X Ltd. and Y Ltd. are as under :

Liabilities Rs. Assets Rs.

60,000 Equity shares of Rs. 100 each 60,00,000 Buildings 20,00,000
fully paid 8,00,000 Machinery 26,00,000
General reserve 4,80,000 Furniture 40,000
Profit and loss account' 9.60.000 Stock 16,00,000
C reditors Debtors 9,20,000
Cash in hand 2,80,000
Bank 8,00,000
82,40,000 82.40,000

.258
 Y LTd.

Rs. Rs.
Liabilities
20,000 Equity Shares of Rs. 100 Goodri/ill 4,00,000
each fu!!y paid 20,00,000 Machinery 16,80,000
Caoita! Reserve 2,00,000 Furniture 20,000
Gerrral Reserve '1,00,000 Stcrck 7,20,000
Prclit and loss account 1,40,000 Debtors 7,20,00b
1 2oro delrentures 12,80,000 Cash in hand 20,000
ir*.C'to-s 3,80,000 Bank 1,60,000
Expendil.ure on fiew 3,0c,000
nretect
40,20,000 40,20,000

Y ltc!, was absorbed by X Ltd. on l"tApri!, 1999 on the following terms :

/i) Fixed assets other than goodwiil to be valued at Rs. 20,00,000 including R$. 24,000
for furniture.
(ii) Stock to be reduced by Rs.80,000 and debtors by 5%
(iii) x Ltd. io assume liabilities and to discharge the 12% debeniures by issue of 11%
debentures of ihe same value and in addition a premium of 6Yo was paid in cash.

{iv) The new pruject to be valued at Rs.3,80,000;

(v) The shareholders of y Ltd. to receive cash paymeni of Rs.30 per share plus four
equity shares in X Ltd. for every five share$ held in Y Ltd'
(vi) Both the companies to declare and pay dividend of 6% prior to absorption.
(vii)Expenses of liquidation of Y Ltd. are to be reimbursed by X Ltd. to the extent of
Rs.20,000.

The actual expenses ainounted to Rs.24,000.

Draft journal entries in the books of X Ltd. and Y Ltd. and prepare the balance sheet of
X Ltd. after absorption assuming that X's authorized capital in Rs.B0'00,000.

Solution

It si a case of amalgamation in the nature of purhase because adjusiments are intended

i
corporaied
to be made to the book values of assets of the transferor company lvhen they are
in the financial statements of the transferee company. As per AS-14, payment made'to
debenture holders and the cost of absorption agreed to be paid are not io be a part of the
purchase cortsideration.

259
Calculation of Purchase Consideration

Rs.
Shareholders of Y Ltd- 10 get
Cash for 20,000 shares @ Rs.30 6,00,000 (Cash)
Equriy shares @ 4 shares in X Ltd. for every 5 16,00,000 (Shares)
4
shares in Y Led. 20.000 x -5 x Rs.100
Purchase consideration 22,00,000

In the Books of Y Lid.

JOURNAL ENTRIES
1579 Rs. Rs
April Profit and loss account Dr. '1,20,000
1 To dividend payable Account 1,20,00
(Being dividend @ 6% payable on Rs. 20,00,000
share capital)
Dividend payable account 1,20,000
To bank account '1,20,00(
(Being paymenl of dlvidend)
Realization account Dr. 38,96,000
To goodwill accounl 4,00,001
To machinery account 16,80,00
To fumiiure account 20,00r
To stock account 7,20,00r
To debtors account 7 ,20,)al
To cash accounf 36,001
To bank accounl (1,60,000 * 1,20,000 - 4,000) 3,00,001
To new project account
(Being transfei of assels to realization fuc)
12% debentures account
Crediror s account
To realization account 12,00,000
(Being liabilities agreed to be paid by X Ltd. 3,80,000
transtef red to realization account) 15,80,00(
X Ltd. Dr.
To realization account
{Being plrchase consideration agreed to be paid by X
Lrd. )
22,00,000
Bank accouni Dr. 22,00,00(
Equity shares in X Ltd. Account
To X Ltd.
]:Being receipt of purchase consideration) 6,00,000
Realization account Dr.
16,00,00
To bank A/c 22,00,00(
(Being payment of realizalion expenses not
leimbursed by X Ltd).
Equiiy shareholders account Dr. 4,000
To realization accounl 4,00(
(Being loss on realjzation transferred to equity
sharelrq]ders account)

260
 1 ,20,000
1 ,20,000

20,00,000
2,0c,000
1,00,000

20,000

16,00,000
000
ln the Books of X Ltd.
JOURNAL ENTRIES
1S9g ' R.. l Rs.
April Business purchase account Dr. 22,00,000 | 22,00,000
1 To liquidators of Y Ltd.
(Being purchase consideration agreed to be paid for
_pg1qlqqe of business of Y Ltd.)
accouni
Machinery Dr.
account
Furniture Dr, 19,76,000
Stockaccount Dr. 24,000
account
Debtors Dr. 6,40,000
Cash account Dr. 7,20,000
Bank account Dr. 20,000
account
New project Dr. 36,000
Goodwill account 3,B0,000
figure)
(Baiancing Dr. 20,000
To provision for doubtful debts account 36,000
To I 2olo debentures account 1,20,000
To creditors account 3,80,000
To business purchase account 22,00,000
(Being assets and liabilitieq of y Ltd. taken over)
1 2olo Debentures account
.Goodwill account
To 1 1% debentures account
To bank account 12,00,000 |
(Being payment of 12% debentures at a Dremium of 72,000
' |
6%, premium debited to Goodwill eccount)
- Dt=.."..----.--- | 12,00,000
Goodwill account i 72,000
To bank account
(Being payment of cost of liquidation debited to
Goodw;ll Account)

261
 20,00c

22,00,000
16,00;000
6;00,000

Balance Sheet of X Ltd.

as on 1"'April, 1999

Liabilities Rs. Assets Rs.

Share capital Fixed Assets
Authorised Goodwill 'r,'12,000
80,000 equity shares of Rs. 100 each Buildings 20,00,000
lssued and subscribed 80,00,000 Mac[inery 45,76,000
76,000 equity shares of Rs. 100 each Furniture 64,000
fully paiQ New project 3,80,000
(Of the above 16.000 shares issued for Curent asseis
purchase of Y Ltd.) 76,00,000 Stock 22,40,000
Reserve & surplus Debtors 16,40,000
General reserve Less :
Profit & loss accouht provision for
.Secured loans doubtful
1 1% debentures debts 36,000
Current liabilities 8,00,000 16,04,000
Creditors 1,20,000 Cash and Bank 84,000
balance
12,00,000

13.40.000
1 ,1 0,60,000 1.10,60,000

Illustration - 9

A Ltd. and B Ltd. agreed to amalgamate and form a new company, C ltd., which will take over
ali the asseis and liabilities of the two companies on lhe basis on amalgamation in the natur€
of purchase.

.262
 In the case ofA Ltd. the assets and iiabilities are to be taken ovei at book value for
shares in c Ltd. at the rate of 5 shares in c Ltd. at 10% premium (i.e. Rs. 11 per share) for
every four shares in.A Ltd.

ln the case of B Ltd. :

(i) The debentures of B Ltd. would be paid off by the issue of an equal numQer of
debentures in C Ltd. at a discount of 10Yo.

(ii) The holders of 10% preference shares of B Ltd. would be allotted four 1 2%
preferencb shares of Rs.100 each in C Ltd. for every five preferenpe shares in B
Ltd.

(iii) The equity shareholders would be allotted sufficient shares in C ltd' to cover the
balance on their accounis after adjusting asset values by reducing plant and
machinery by 10% and providing 55 on Sundry debtors.

The summarized balance sheets of the two companies just prior to amalgamation
were as follows :

Liabilities A Ltd. B Ltd. Assets . A Ltd, B Ltd.

Rs. Rs. Rs. Rs.
EQuily share capital Plant & 8,00,000 8,00,000
shares of .Rs.10 each Machinery
10% pref. shares of 4,00,000 C,UU,UUU Stock 65,000 60,000
Rs.100 each Debtors 95,000 50,000
147o debentures 3,00,000 Profit & loss A'lc 1,40,000
Profit & loss 4Jc 2,00,000. Bank
uontngency reserve 5,00,000 65,000 40,000
Creditors 50,000

75,000 90.000
10,25,000 10.90.000 10.25,000 10;90,000

Show the journal entries in the books ofA Ltd. and B Ltd. show the Balance sheet of
c rtd.

Solution
Calculatign of Purchase consideration for A Ltd.
Shareholders ofA Ltd. are to get 5 shares in C Ltd. @ Rs. 11 per share for every 4
shares in A Ltd.
A Ltd. has 40,000 shares ; so shareholders of A Ltd. will get 50,000 (i.e. 5/4 x 40,000)
share @ Rsl 11 per share.

263
 7,20,0(

60.0(
47,5C

40,0c
8.67

2.70.00
5,97,50r

;"r?Foo
'10,000
1,70,000
2,00,000
20,000
30,000

:,2,64
 ,:1.,'. - -t -.! a r :. , r::

BALANCE SHEET OF X CO. LTD.

as on lsrApril, 1999 (after absorption)
Liabilities Rs. Assets RS,
Share capital : Fixed assets :

98,000 equity shareS of lnvestments (80,000

Rs. 10 each Rs. 5 per share called up 20,000 - 30,000)
- 4,00,000
4,90,000 Current assets 30,000
3,000 equity Stock-in-trade
shares of Book Debts less
Rs. 10 each fully provision 3,00,000- 4,70,000
Paid for consideration 5,20,000 10,000)
Other than cash 30,000 Cash at bank
Reserves $ surplus : 8,935 2,90,000
Capital reserve 70,000
Profit & loss A,/c 13,06s
(1 .1 3.065 - 1 ,00,000)
qa^r r6rt l.line '
r
1,70,000
debentures (2,00,000 - 30,00O)'
current liabilities & provisions. current
liabilities
Sundry.trade creditors
(3;00,000 t 2,00,000 -50,000)
Eguity dividend payable 4,50,000
(1,00,000 - 2,000)

98.000
12,60,000 12,60,000

Calculation of purchase consideration

80.000 - 20.000
'"li6i-'---
No of shares in Y Co. Ltd. by outsiders ='trO .iDnvEn
Number of shares to be issued to outsiders @ shares for any 2 shares Efi =3,000

Shares already held by Y co, Ltd. 2,000 (i.e., rs.10,000 in shaies of Rs. 5 each).

Calculation of ourchases consideration Rs- .

1 .000 shares isSued as fullv oaid uo 10.000

Add :Addiiional amount on 2,000 10,000
them fullv paid uo Rs..10 shares
Purchase consider'ation 20.000 '
Questions
Objective Type
I . State whether the following statements are True or False :

265
(a) When two or more compariies go into liquidation and a new company is formed to t
over their business, it is called absorption.
(b) The net worth is arrived at by adding the agreed value of assets laken over by
purchasing company minus agreed value of the liabilities assumed by the purchas
company.

(c) External reconstruction means reduction of capital of a company which is to

reconstructed.
(d) Under nei payment method, purchase consideration is calculated by adding the vari,
payments made by the purchasing company.

(e) Accident compensation fund is a liability and should be closed by transferring i

realization account.
Ans. (True : (b), (d), False : (a), (c) and (e).
2. Fill in the blanks:

(a) When an existing company takes over the business of one or more existing compan
it is called
(b) ........ is the amourit which is paid by the purchasing company for the purchase of
business of the vendor company.
(c) Cost of liquidation of the vendor company agreed to be paid by the purchasing comp
is debited to .. . , .. .. . in the books of the latter company.

(d) Accumulated losses in the vendor company should be transferred to ;......

Ans. [(p) absorption; (b) purchase consideration; (c) goodwill or Capital Reserve Account:
- Equity shareholders account
l.
Short Answer Type
1. What do you mean by amalgamation in the nature of merger?
2. What is the difference between internal reconstruction and external reconstruction
3. Give the names of various methods of calculating purchase consideration.
4. What is the journal entry to be passed by the purchasing company for making paym
of liquidation expenses of the vendor company ?
5. What do you mean by inter company Owings ?

6. When the purchase price exceeds the net value of the business taken over hol
difference dealt with I
7 . How are accumulated losses in the vendor company treated?

266
 Ir '. r

B' lf a company is purchased for a price which is less then

net value, how will you deal with
the difference?

9. How are reserveb of the transferor company treated in

the books of the transferee
company in case of amalgamation in the nature of merger.

Long Answer Type

1. Define amargamation. what entries are passed by a
company to crose its books wnen
it is amalgamated by another company?

2. What entries shourd be passed in the bpoks of a company

that goes into riquidation for
the purpose of amalgamation ?

3 what do you mean by the varue of business ? rf a concern is purchased

for a price
which is less than net value how will you deal with the
difference ?
4 rf the purchasing bompany issues fulry paid shares
to the riquidating company at a
premium, how wiil they be deart with / Exprain
and give the necessary iournar entries.
5. Explain pooling interest method of amalgamation.

6: Give clearly the differerice between amalgamation

in the nature .of merger. and
amalgamation in the nature of purchase.
7 ' what entries shourd be passed in the books of a
transferee company in the case of an
amalgamation in the nature of purchase.
PRACTICAL PROBLEMS

Amalgamation

1. The following are the abridged balance sheets

of A Ltd. and B L!d. as at 31"r March
zuu:

l Lrctu|ltatcs
A Ltd. B. Ltd. Assets A Ltd. B Ltd.
Rs.'000 Rs.'000 Rs.'000 Rs. '000
I Equity share capital Fixed
| (Rs.1 0 each) 24,900 9,000. assets 33,000 14,190
112%.pref. share capitat (Rs. 100 Current 12,000 5,910
each)
3,000 assets
General Reserve
Statutory reserve
13,830 2,940
Profit and loss A./c
1

1,1701
13% debentures
1,68e 1,065
Current liabilities I
750
4,31; I 2,970
45,000 20,100 45,000 20,100

267
On 1"rApril, 2000 A takes over b L!d. on the following terms.;

(i) A Ltd. will issue 10,50,000 equity shares of Rs. t 0 each at part to the equity sharehotder
of B Ltd.

(ii) willissue 33,000 12% preference shares of Rs.100 each at partio the pref4erenc
A Ltd.
shareholders of B Ltd.

(iii) The de-bentures of B Ltd will be converted into equal number of 14zo debentures
of th
same denomination.

You are informed that the statutory reserves of B Ltd are to be maintained for
two mor
years. You are required to show the balance sheet ofA Ltd. immediaiely
after the abov
. mentioned scheme of amalgamation has been implemented assuming that
:
(a) the amalgamatign is in the nature of merger and .

(b) the amalgamation is in the nature of purchase.

Ans. [(a) B/S Totat (Rs. '000) 65,100; (b) B/S Torat (Rs. ,000) 6S,a75]

1' x Ltd. and Y Ltd. decided to amalgamate and new company viz. Xy Ltd. is formed
to o
the Companies as on that date :

X Ltd. YLtd. X Ltd. Y Ltct

(Rs. In (Rs. In (Rs, In (Rs. In
lakhs) lakhs) lakhs) la lu hc\
Share capital of Rs,10 fully Goodwill 10 8.00
paro AN 2n
Reserve fund .Land & Building 25, 19.00
Profit & loss a/c
20 t3 Plant & Machinery 20, 25.50
Div. Equalization fund
i)

{n
Peltents& Trade
mark
Workmen's compensation Stoclc
fund 5.25
Sundry debtors 20 15.00
Bank overdrbft B/R
Sundry Creditors 5.00
Cash at Bank 2.0;0
Bills payable
.25
al

l
{n
I

90 80 90 I OU

.268
Ans. [Purchase consideration X Ltd. Rs.75 lakhs, Y Ltd. Rs.60 lakhs, B/S total ofXY Ltd. Rs.
| ^1.^^ 1
"'7A

1. The following are the balanoe sheets of G Ltd. and H Ltd.

Liabilities G Ltd. Rs. H Ltd. Rs. Assets G Ltd. Rs. H Ltd. Rs.
Equity share Land & 2S,00,000 12,00,000
capital (Rs.10 building
each) 50,00,000 20,00,000 Plant &
Pref, Sh:ire capital machinery 45,00,000 18,00,000
(Rs.100 each) 20,00,000 10,0q,000 Furniture 5,00,000 2,00,000
General reserve 8,00,000 2,00,000 Stock 15,00,000 5,00,000
Investment . Debtors 10,00,000 7,00,000
allowance Cash at bank 5,00,000 3,00,000
Reserve 7,00,000 3,00,000
Profit & loss AJc
12% debentures
(Rs.100 each) 10,00,000 5,00,000
Trade creditors
Other curent 5,00,000 2,00,000
liabilities 5,00,000 3,00,000

1,09,00,000 47,00,000 1,09,00,000 47,00.000

G Ltd. takes ovei H Ltd. as onApril 1,2000. G Ltd. discharges the purchase consideration
as follows :

(i) lssued 2,00,000 equity shares of Rs.10 each at Rs.12.50 to the equity shareholders of'
Hl+,{
'||r-l\.1.

(ii) lsbtJed 15Yo preference shares of Rs.100 each to discharge the preference shares of H
I td af nar
The debentures of H Ltd. will be converted into equivalent number of debentures oI t.z

Ltd.
,. ']
The investment allowance reserve of H ltd. is to be maintained for two more years. The
fair value of plant & machinery of H Ltd. is Rs.15,00,000. Make entries in the books of
G Ltd. and show the batance sheet of G Ltd. after amalgamation assuniing that :
(i) The amalgamation is in the nature of merger,
(ii) The amalgamation is in the nature of purchase. '

Ans [Total of balance sheet in (i) & (ii) rs.1,56,00,000]

1. Deva Ltd.,' and Asura Ltd., carrying on similar business agreed to amalgamate by
transferring their undertaking to a new company, Devasura Ltd.

269
The terms of agreement were as follows :

(a) The purchase consideralion consisted of:

(i)The .assumption of liabilities of both the companies : ;(ii) the discharger of the
debentures in Asura Ltd., at a premium of 570 by Devasura Ltd. by the issue of 7%
debentures ; (iii) the issue of 10 equity shares of rs.10 each at a premium of Rs.2 per
share for each preference share held in both the companies; (ivO the issue of 1o equ'ty
shares of Rs. 10 each at a premium of rs.2 per share and rs.22 in cash for each equity
share in Deva Ltd., and 5 equity shares of rs.10 each at a premium of Rs.2 per share
and Rs.80 in cash for very equity share in Asura Ltd.

(b) All the assets and liabilities of the two companies were taken over at their book varues
except that a provision @ 5olo to be raised on debtors.

(c) in order to raise working capital and to pay the purchase consideration, Devasura Ltd.
decided to issue 30,000 equity shares of rs.10 each at a premium of Rs.2.50 per share.

Your are required to :

(i) pass journal entries in the books of Deva Ltd., to close its accounts. and

(ii) Show the opening balance sheet of. Devasura Ltd. assuming amalgamation has been
done in the nature of purchase.

Deva Ltd. Rs. Asura Ltd. Rs.

Ans. [purchase consideration : 13,10,000 7,20,000
Value of goodwill (taken over)
Loss on Realization 52,900 '48,230
Balance Sheet Total of Devasura Ltd. Rs.
22,0J,0001 49,900

5. Following is the balance sheet of M/s Desai Bros. as on 31"r March. 2000.

Liabilities Rs Assets Rs.

42,500 Freehold premises 25,000
Bank loan 20,000 Furniture 3,500
Bills payable 6,700 Motor Van 12,800
Creditors 10,800 Stock 13,200
Bills receivable 5,400
Debtors 18,700
Cash 1,400
80,000 80,000

270
 On the ab6ve date the entire business was iaken over by Ding Dong Bell Ltd. The
purchase consideration was paid as.under:
(i) 3,000 fully paid Rs.10 shares.
(ii) The balance in cash.
While recording the assets, the company valued the premises and stock at 10% and
20% above their book value respectively. Find.out purchase consideration and pass necessary
entries in the books of the Ding Dong Bell ltd., and show its balance sheet after take over of
the business.
Ans [Purchase consideration rs.47,640 : B/S total Rs,83,740].
1. The following is the balance sheet or Beta Company limited as at 31"'March, 1995 :
Liabilities Rs. Assets Rs.
Share caoital : Buildings 2,00,000
24,000 shares of Rs,10 each fully paid Plant & Mechinery 80,000
Sundry creditors 2,40,000 Stock of Goods 30,000
Bank loan 60,000 Sundry debtors 42,000
52,000
3,52,000 3.52.000
' The company went into liquidation and the assets were sold to Alpha company Ltd. for
Rs.2,94,000. The consideration was payable as follows
Rs. 1,14,000 in cash (which sufficed to discharge the liabilities and to pay the cost of
winding up rs.2,000) and the balance Rs.1,80,000 by the aliotment of 24,000 shares of
Rs.l0 each, rs.7.50 per share paid up to the shareholders of Beta Company Ltd.
Close the books of Beta Gompany limited and give necessary entries for recording the
transactions in the books of Alpha Company Limited.
Ans. [Loss on Realization Rs.60,0001; Capital reserve rs.58,000].
1. The Board of Directois bf Lucky Ltd. decided to amalgamation the Unlucky Ltd. the
Balance Sheet of the two companies as on 31"t March, 2000 are given below :

Liabilities Lucky Unlucky Assets Lucky Unlucky

Ltd. Ltd. Ltd. Ltd.
KS . Rs. Rs. Rs.
Share capital : Goodwill 10,000 '10,000
5% preference shares of Re. Copy Rights 5,000
1 each 10,000 Land & Buildings 25,C00 15,000
Equity shares of Re. 1 each Plant 35,000
Capilal reserve Debtors 10,000 10,000
General reserve 63,000 20,000 Closing Stock 10,000 5,000
Creditors 30;000 Cash in Hand 30,000
Overdraft 30,000 Profit & Loss A"/c 10,000
2,000 '10,000
10,000

1,25,000 50.000 1,25,000 50,000

271
The terms of sales are as follows :

(i) Lucky Ltd. takes over both assets and liabilities of unlucky ltd'

LESSON - 2

INTERNAL RECONTRUCTION

Meaning
going into
ln internal reconstruction, the objective of reorganizatibn is achieved without
the process of lgiquidatiohn. For this purpose, provisions of the companiesAct' 1956 relating
to alternation of share capital (sections 94 to 97) and reduction of share capital (section
100

to 105) are utilized.

The process of internal reconstruction, sometimes involves the alternation of share
capital sections 94 to 97 of the Act deals with alteration of Capital' lt may take the form or
fresh issue of shires, consolidation of 6xisting shares, sub division of existing shares
conversion of fully paid shares into siock and cancellation of unissued capital. As alteratior
of capital does not have. for reaching effect, it can be carried On by passing an ordinar)
resolution provided the articles of association of the company do not prohibit such alternation

REDUCTION OF SHARE CAPITAL

'l T.3Reduction of share capital may take the following forms :

1. Reducing the uncatted capital - Inc se of partly paid up shares, the decision may bt
taken to write off uncalled capital. This reduces the liability of members and thus, affect th(
rights of external stakeholders as the security cover available io external stakeholders depent
upon paid up capital as well as uncalled capital which can be demanded by the company a
any time during its lifetime. The decision to write off ungalled capital have no effect on pair
up capital but it reduces the par value of shares.

lllustration - 1

-r!^^
^^i.r ,.^ Lzqp'L@'
p.,'u-uy ^^#^^^\, i-
u' a^ company
^^^i+^r ^{ is D- a nn nnn consisting of 10,000 equity shares c
Rs.8,00,000 ^^
' ',E
rs.100 each, Rs.B0 called up. The company passes a special resolution for reducing it shan
capitai by canceling its uncalled capital. Pas a journal eniry to give effect to the above assuminl
that such reduction is permitted bythe articles of association of the company and the resolutio
is confirmed bv the court.

Share Capital (Rs. 10 each) tuc Dr.

To share capital (Rs.80 each) AJc
(For conversion of partly paid up shares of Rs.100 each into
fully paid up shares of Rs. B0 each by cancellation of the

272
I

2. Retum of paid up capital - lf a company feets that it has capital whibh is in excess of its
requirement, it may decide to return paid up capital to its members. lt reduces paid up capital
and generally involves reduction in face value of shares.

lllustration - 2

The paid up capital of a company is Rs.8,00,000 consisting of 80,000 shares of rs.10

6ach.fully paid up. The companyfinds tht it has excess cash funds amounting to Rs.2,00,000
and resolves to refund this amount to shareholders. pass journal entries assuming that
necessary formalities are complied with.

Share capital (Rs.10 each) A/c Dr. 8,00,000

To share capital (Rs.7.50 each) A/c 6,00,000
(For reduction in paid up iapital by Rs,2,00,000 by 2,00,000
conversion of rs.10 shares into Rs.7S0 share and refund
of the amount to shareholders)
Shareholder A,/c Dr.
To bank A,/c
(for amount refunded to shareholders) 2,00,000
2,00,000

273
t t'

UNIT - V
LESSON -I

In this resson we wi, discuss how

funds flow statement of i company is prepares
1. Introduction

2. Meaning and concept of fund

3. Meaning of flow of fund

4. Mebning of fund flow siatement

5. Significance of funds flow statement

6. Schedule of changes in working capiial

7. Funds from operation

8. Preparation of funds flow statement

Review exercises

10. Prescribed books.

LESSON ... 2
In this less we will discuss
how to prepare the cash flow statement
of a company _
Introduction

Definition of cash flow statement

Procedure for preparing cash flow

statement
Comparison between fund flow
and cash flow statemeni
Uses and significance of cash
flow statement.
Limitations of cash flow statement

Cash from operation

Preparation of cash flow statement

Miscellaneous examples

274
10. Review exercises

1'1 . Prescribed boot<s.

Lesson Plan :

ln this unit we will discuss what is fundwhat are the sources and applications of fund for
a business. How a funds flow statement is prepared.

1. tntroduction
2. , Meaning and concept of fund
3. Meaning of flow of fund
4. Meaning af fund flow statement
5. Significance of funds flow statement
6. Limitation of funds flow statement
7. Schedule of changes in working capital
B. Funds from operation
9. Funds flow statement
INTRODUCTION

As perAs-3 the funds flow statement is defined as a statement that summarizes for the
period covered by it, the changes in financial position includihg the sources from which funds
were obtained by the enterprise and the specific uses to which such funds were applied-

The statement of changes in financial position is a broad term which includes both the
funds flow and qash flow statements. Where the statement is prepared to ascertain the
increase in working capital the statemeni is generally referred to as funds flow statement.

The funds flow statement gives a meaningful link between the balance sheets at the
beginning and at the end of the period and the profit and loss account of the period. .t

The funds flow statement is a stat,ement which shows the movement of funds and is a
report of financidl operations of the business undertaking. lt indicates various means by
whiCh funds were obtained during a particular period and the ways in which these funds were
employed. In simple words, it is a statement of sources and application of funds'

275
 MEANING AND CONCEPT OF FUNDS

The term 'funds' has been defined in a number of ways.

(a) In a narrow sense - it means cash only and a funds flow statement prepared on tt
basis is called a cash flow statement such a statement enumerates net effects of t
various business transactions on cash and takes into account ri:ceipts and disbursemer
of cash.

(b) In a.broader sense - the term 'funds' refers to money values form it may exist. He
'funds'means all financial resources, used in business whether in the
form of mee
material, money, machinery and others.

(c) In a popular seDS€ - the term 'funds' means working capital, the excess of curre
assets over current liabilities. The working capital funds has emerged due to the fe
that total resources of a business are invested partly in fixed asserts'in the form of fixr
capital and partly kept in form of liquid or near liquid form gf working capital.

However, the concept of funds is known as working capital in the most popular and
this chapter we shall refer to'funds'as working capital and a funds flow statement as
statement of sources and application of funds.

MEANING AND CONCEPT OF 'FLOW OF FUNDSI

The terrn 'flow' means movement and included both 'inflow'.and 'outflow,. The terr
'flow of funds' mean transfer of economic values from one assert of equity
to another. Flow
funds is said to have taken place when any transaction makes changes in the amount
funds available before happening of the transaction. lf the effect of transaction results in tf
increase of funds, it is called as a source of funds and if if results in the decrease of funds,
is known as an application offunds. Further, in case the transaction does not charge fund
it is said to have not resulted in the flow of funds. According to the working capital concep
of funds, the term 'flow of funds'refers tothe movement of funds in the working capital. lf
ar
transaction results in the increase in working capital it is baid to be an application or inflow.
funds and if it resrrlt" in the decrease of wbrking capital, it is said a source or out flow I

funds.

Rule

The flow of funds occurs when a transaction changes on the one hand a non-currei
account and the othei a current account and vice-versa.

when a change in non-current account e.g., fixed asserts longterm liabilities, reserve
and surplus, factious asserls, etc., is followed by a change in another non-current account,
does not amount io flow of funds. This is because of the fact that in such cases neither fl-

276
 accounl
Srnrilarly,wh-en a change in one current
working capital increas€s nsr decreases'
resu|tsinachangeinanother"u,rentaccount,it,doesnotaffecifunds.Fundsmovefrom
'non.currenttocurrenttransactionaffects(i)acurrentassertandafixedassert,or(ii)afiied curient
and a current tiability or (iii)l crrr"nt
ur""Jrnd a fixed liability, (iv) a fixed liability and
and fixed liability or
uaru,* ,uo" o" wnen $,e transaction affects fixed assets
""1 "",;""
curreni assets and current liabilities' '
ACCOUNT
LIST OF CURRENT OR WORKING CAPITAL

CAPITALACCOUNTS
LIST OF NON..CURRENT OR PERMANENT

277
 Capital reserve Debit balance of proflt and lol
account
10. Capital redemption reserve 10. Discount on issue of shares
11 Provision for depreciation against fixed 11 Discount on issue of debentures
assets.
tz- Appropriation of profits.
(a) General reserve 13. Other deferred expenses
(b) Dividend equalization fund
(c) Insurance fund
(d) Composition fund
(e) Sinking fund
(f) Investment fluctuation fund
(g) Provision for taxation
(h) Prqposed dividend.
PROCEDURE FOR KNOWING WHETHER A TRANSACTION RESULTS IN'THE F[ T
OF FUNDS OR NOT

1. Analyse ihe.transaction and find out the two accounts involved.

2. Make journal entry of the transaction.

3. Determine whether the accounts involved in the transaction are current or non-cLlrre
4. lf both the accounts involved are current i.e. either current assets or current liabilities
does not result in the flow of funds.
5, lf both the account involved are non-current, i.e., either permanent asserts or perman(
liabilities, it still does not result in the flow of funds.
6. lf the account involved are such that one is a current account while the other is a n(
current account, i.e, current assert and permanent assert libbility, or current assert a
fixed assert, or current liability and fixed assert, or current liability and permanent liabi
then it results in the flow of funds.

EXAMPLES

A- Transactions which involve only the current accounts and hence do not result
the flow of funds :
1. Cash collected from debtors
2. Bill receivables realized
3. Cash paid to creditors.
4. Payment or discharge of bills payable.

278
5. lssued billsrpayabie to trade creditors
6. Received acceptance from customers
7. Raising of short-term loans
8. Sale of temporary or mat'ketable inveslments
9. Goods purchased for cash or credit'
and hence do not result in
B. Transaction which involved only non'current account
the flow of funds'
machines
Purchase of one new machine in exchange of two old
Purchase of building or furniture in exchange of land
Conversion of debentures into shares:
Redemption of preference shqres in exchange of debentures'
Transfers to g6neral reserves, etc'
Payment of bonus in the form of shares'
Purchaseoffixedassetstnexchangeofshares,debenturesbondsor|ong.term|oans.
Writing off of fictitious assets'
'Writing etc'
off of accumulated losses or discount on issue of shares'
account and hence result
Transactions which involve both current and non-current
in the flow of funds.
1: lssue of shares for cash'
2. lssue of debentures for cash'
3. Rising of long-term loans.
4. Sale of fixed assets on cash or credit'
5. Sale of trade investments.
6. Redemption of preference shares.
7. Redemption of debentures.
B. Purchase of fixed assets on cash or credit
9. Purchase of long-term trade investments'
10. Payment of bonus in cash.
11. Repayment of long{erm loans.
1 2. lssue of shares against purchase ol stock in trude'

279
MEANING AND DEFINITON OF FUDNS FLOW STATEMENT

l.c.w.A in€lossary of management accounting terms defines funds flow statement as

'a statement either prospective or retrospective, setting out the sources and applications o1
the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement
of funds and how they are proposed to be raised and the efficient utilization and application
of the same".

Thus funds flow statement is a statement Which indicates various means by which the
funds have been obtained during a certain period and the ways to which these funds have
been used during that period. The term'funds'used here means working capital, i.e.' the
excess of current assets over current liabilities.

' Funds flow staiement is called by various names such as sources and application ol
{unds. Statement of changes in financial positions, sources and cases of funds, used here
means working capital, i.e., the excess of current assets over current liabilities.

Funds flow statement is called by various names such as soufces and application o
funds, statement of charges in financial positions, sources and uses of funds, summary o
financial operations. Where come in and where gone out statement. Where got, where gon€
statement. Movement of working capital statement. Movement of funds statement. Funds
received and Disbursed statement funds gen6ral and expended statement, sources of increase
and application of decrease, funds statement etc.

DIFFERENCE BETWEEN FUNDS FLOW STATEEMNT AND INCOME STATEMENT

Funds flow statement lncome stalement

(1) It highlights the changes in the financial position (1) It does not reveal the inflows
of a business and indicates the various means by and outflows of funds but
which funds were obtained during particular depicts the items of expenses
period and the ways to which these funds were and income arrive at the
emoloved. fioure of orofit or loss.
(2) It is complementary to income statement income (2\ Income statement is nor
statement helps the preparation of funds flow prepared fromr funds flow
statement. statement.
(3) While preparing funds flow statement both capital (3) Only revenue items aTe
and revenue items are considered. considered.
(4) There is no prescribed formal for preparing a (4) It is prepared in a prescribed
funds flow statement. formal.

280
 STATEEMNT,AN? BAIIN
DIFFERENCE BETWEEN FUNDS FLOW

of funds flow statement

Uses, signifiqanie and importance
from its
or importance of funds flow statement can be well followed
The significance
various uses given below'
operations - The financial statement revel the
(1) lt helps in the analysis of financial
neteffectofVarioustransactionsontheoperationa|andfinanciaIpositionofaconcern.
and the uses to
of the resources of a business
The balance sheet gives a static view
whichtheseresourceshavebeenputatacertainpointoftime.Butitdoesnotdisclose points of
liabilities between two differ6nt
the causes to,.tungd-in tie a"s"rts and
causes for such charges.ato-1!"^l:"^*"t "t
time. The funds flow statement explains may
of the conlpanY' Some times a concern
these changes on the liquidity position worse' The
i"i'tt position may become more and more
operate profitab'v
"to ""sh
fundsf|owStatemenrn'u"";"",'answertosuch'asituationexp|ainingwhathas
happened to the Profits of the firm'

(2)

(b)
(c)
(d)

281
 of debt?
(f)' what are the sources of the repayment
'n working udPrror r'rq"v's' antl how
caPital financial wi be financed in future.
(S) Howwas the increase In wolKrrrg
dividend -policy Sometimes a firm has sufficiel
-
(3). tt hetps in the formation of a realistic
yet it may not be advisable to distribul
profits available for distribution as dividend but
In such cases-' a funds flow statemer
dividend for lack of liquid or cash resources'
policy
ftelps in the formation of a realistic dividend
resources The resources of a concern
al
(4) In helps in the proper allocation of -
a|ways|imitedand|twantstomakethebestuseoftheseresources.Aprojectedfunt Tl
in making managerial decisions'
flow statement conslructed for the futurb helps
and allocate them among vanot
firms can plan the ceployment of its resources
aPPlications
oui as a guide
- A projected funds flow statement also
1

It acts as it future guide

can come to know the various probler
future to the management' The management
The firnp' future needs of funds c
it is going to face in near future for want of funds'
needs' The firm can arran
i" pioi.Jt.o well in advance and also the timing of these problems.
avoid future
to finance these needs more effectively and
I

Helps in Throws
Analysis of light on
Financial perplexing
Statement questions

Helps
Helps the for
knowing the . mean of
I
credit
dividend
Worthings
action policY

Helps the
Helps in the
use of
proper
Working
allocation of
capital Acts
resources A

- A funds flow ttatement hell

(6) It helps in appraising the use of working capital
used its working capital and also sugg
explaining how efficienily the management has
way io improve working capital position of the firm'
- the financial institut
(7) It hetps knowing the overall credit worthiness of a firm
 andbankssuchaSstatefinancia|insiitutions.lndustria|Developmentcorporation.
IndustriarFinancecorporuti*ofrndia,rndustriardeveropmentbankoflndia,etc,all
years before granting loans to
for a number of
ask for funds flow statement constructed
paying capacity of the firm Hence a
firm seeking financial
know the credit wortniness anJ
assistancefromtheseinstitutionshasnoalternativebuttopreparefundSf|oWstatement]S.

LIMITATIONS OF FUNDS FLOW STATEMENT

Thefundsf|owstatementhasanuntberofuseshoweverithascertainlimitationsalso'
which are listed below'
an tncome
flow statement is no a substitute ot
,1 . lt should be remembered that a funds
information as regards
,"i"r;" of a balance sheet_ lt provides only some additional
changes.in working caPital'

2. ln cannot revel continuous cnanges'

.
- arrangement of data give in the financial
3. lt is not an original statement.but simpry are
statements.
prepared
projecied funds flow statement cannot be
4. lt is essentially historic in nature and
with much accuracy.
./ revelant for financial management than
the
5. Changes in cash are more important and
working caPital.
FLOW STATEMENT
PROCEDURE FOR PREPARING A FUNDS
position
we study changes in the financial
Funds flow statement rs a method by which
ofabusinessenierprisebetweenbeginningandendingfinancia|statemenisdates,Here'
with help of such
two balarce sheets and
ihb funds flow statement is prepared by comparing
derived from the accounts as may be
needed' Broadly speaking' the
.tn"t
'"ittr,i"n
preparation of a funds flow statement consists of
two parts'

capital'
1. Statement of schedute o{ charges in working

2. Statement of sources and application of funds'

tN WORKING CAPTTAL
(1) STATEMENTOR SCHEDULE OF CHANGES

As, working capital = current assets - current liabilities'

So, (i) An increase In current asserts increases working capital'

(ri) A decrease in current assets decreases' working capital'
working capital and '
(iii) An increase in current liabilities decreases

283
 (iv) A decrease in cunent liabilities increases vrorking capital statenient or schedl
of changes in working capital.
Effect on working ca pita I

Decrease

llh-rstration - 1

Prepare a statement of changes in working, capital from the following balance sheets
Manjit and company limited.
BALANCE SHEETS as at December 31
Liabilities 1994 Rs. 1995 Rs. Asserts 1994 Rs. 1995 Rs.
Equity capital 5,00,000 5,00,000 Fixed assets 6,00,000 7,00,00
Debentures 3,70,000 4,50,000 Long-term
Tax payable 77,000 43,000 Investments 200,000 1,00,00
Accouht payable 96,000 '1,92,000 Work-in-progress 80,000 90,00
lnterest payable 37,000 45,000 Stock-in{rade 1,50,000 2,25,00
Dividend payable 50,000 35,000 Accounts receivable 70,000 1,40,00
cash 30,000 10,o0
11,30,000 12,65,000 1 1,30,000 12,65,

.284
6olution
STATEMENT OF CHANGES INWORKING CAPITAL

1994 Rs. 1995 Rs. EffeCt on working caPital

Particulars
lncrease Rs. Decreases Rs.
Current Assets
30,000 10,000 20,000
Cash
70,000 1,40,000 70,000
Account receivable
1,50,000 2,25,000 75,000
Stock-in-trade
80,000 90,000 10,000
Work-in-progress
3,30,000 4,65,000

Current liabilities
77,000 43,000 34,000
Tax payable
96,000 1,92,000 96,000
Aicount payable
37,000 45,000 8,000
lnterest payable
Dividend payable 50,000 35,000 15,000
2,60,000 3,15,0000
Working capital (CA - CL) 70,000 1,50,000
80,000
Net increase in working 80,000
capital
1,50,000 1,50,000 2,04,000 2,04,000

Try yourself :

From the following two balance sheets as on 31't December 1994 and
1995' you are
required to prepare a schedule of changes in working capital for 1995 :

Dec.31,1994 Dec.31 1995

Rs. Rs.
Assets
60,000 94,000
Cash
Debtors 2,40,000 2,30,000

Stock-in-trade 1,60,000 1,80;000

Land 1,00,000 1,32,000

5,60,000 6,36,000
Capital and liabilities
Share capital 4,00,000 5,00,000
Trade creditors 1,40,000 90,000
20,000 46,000
Retained earnings-
5,60,000 6,36,000

285
t'

Capital Rs'94'000]
[Ans. Net increase in Working
of Funds
l2l Statement of Sources and Application
Fundsflowstatementisastatementwhichfunds(workingcapita|)hdvebeenobtainep(
applicati'rns t:.tl'tn have been
during a certain period and the uses or inu:-",]*tt
two formats :
irri"g *", period Generally, this statement is prepared in
(a) Report form
{b) T form or an account form or self-balancing Type'
FLOW STATEMENT
SPECIMEN OF REPORT FORM OF FUNDS

Funds from operalions

lssue of share caPital
Raising of long-term loans
Receipts from partly paid shares, called up
Sales of non cunent (fixed) assets
Non-trading receipts' such as divi4ends received
Sale of investment (long-term)
Decrease in Working Capital (as per schedule of changes

:,286
 (for the year
T fofm an account form or self-balancing type funds flow statement
ended.,.,)
Rs. Applications Rs.
Sources
Funds from operbtions Funds lost in oPerations
lssue of share capital Redemption of Preference
lssue of debentures Share capital
Raising of long-term loans Redemption of debentures
Receipts from partly paid shares, called up Repayment of long-term loans
Sale of non-current (fixed) assets Purchase of non-current (fixed)
Non{rading recdipts such as dividends assets
Sales of long{erm inveStments Purchase of long{erm Investment
Net decrease in working caPital Non-trading payments
Payment of Dividends"
Payment of tax*
Net increase in working caPitql

*Note. Payment of dividend and tax will appeaf as an application of funds only when these
items are appropriations of profits and not current liabililies'

SOURCES OF FUNDS

The following are the sources from which funds generally flow (come), into the
business:

(1) Funds from operations orTrading Profits

and
Trading profits or the profits from operations of the business is the most important
they
major source of funds. Sales are lhe main source of inflow of funds inlo the business as
flow out
increase current assets (cash, dbbtors or bills receivable) b11t at the same time funds
of business for expenses and cost of goods sold. Thus, the net effect of operations will
be a
goods sold
source of funds if inflow from sales exceeds the outflow for expenses and cost of
and vice-versa. But it must be remembered that funds from operations do not necessarily
mean the profit as shown by the profit and loss account of a firm, because there are many
profit
non-fund or non-operating items which may have been either debited or credited to
and loss account. The examples of such items on the debit side ol a profit and loss account
are : Amortization of fictitious and intangible assets such as goodwill' preliminary, expenses
and discount on issue of shares and debenture written off; appropriation of retained earnings'
such as transfers to reseryes, etc., depreciation and depletion loss on sale of fixed asspts;
payment of dividend, etc. The non-fund items are those, which may be operational expenses
but they do not affect funds of the business, e.g., for depreciation charged tcprofit and loss
account, funds really do not move out of business. Non-operating items are- those wl-lich

287
although may result in the outflow af funds but are not related to the trading operatiohs of tl
business, such as loss on sale of machinery or payment of dividends. The methods
calculating funds from operations have been discussed in the following pages.
Basically, there are two methods of calculating funds from operations :

(a) The first method is to prepare the profit and loss account afresh by taking in
consideration only fund and operational items which involve funds and ar.e related.
the normal operations of the business. The balancing figure in this case will be eith
funds generated from operations or funds lost in operations depending upon wheth
the income or credit side of profit and loss account exceeds the expense or debit sir
of profit and loss account or vice-versa.
(b) The second method (which is generally used) is to proceed from the figure of net prc
or net loss as arrived at from the profit and loss account already prepared. Funds frc
operations by this method can be calculated as under :
a) CALCULATION OF FUNDS FROM OPERATION
Rs

Add Non-fund and non-operating iiems which have been already debited to P & L
AJc
(i) Depreciation and depletion
(ii) Amortization of fictitious and intangible assets such as :

(a) Goodwill
(b) Patents
(c) Trade marks
(d) Preliminary Expenses
(e) Discount on lssue of shares, etc.
(iii)Appropriation bf Retained earnings, such as :
(a) Trahsfer to General reserve
(b) Dividend Equalization fund
(c) Transfer to sinking fund
(d) Contingency Reserve, etc.
.(iv)Loss on sale of any non-cunent (fixed) assets such as.:

(vi) Provision for Taxation (if it is not taken as Cunent liability)

(vii) Any other non-fundinon-operating items r,vhich nave Feen oEniteOEFTt_
Total (A)

288
GE;I6i-fund or non-oper?ting items which have

cnas:

lllustration - 3

B.M..Company presenis the following infoiination ahd you are required io caliulate funds '

289
Solution
roNs
Net Profit (as oiven) Rs. lRs.
::: l i
AAa:
-Non-fund or non-operating items which nave oeen 52;000

debited to t'lL lvc

40,000
lJc9l uula tlvi
^^--^^:^ri^^ I
10,000
Loss on sale of building
:: ., 5,000
Advertisement written oII
Discount on issue of shares written off 500
12,000, a7 6nn
'1 ,i o 6n6

Caifi;salfiiFlant 20,000

Funds from Operations

Try yourself - 3'
- --^-^i'on, from the following income statement'
Calculate funds from oPeratl
-.jNe6fr-ffiArEMENr

To Rent Paid sale of vehicle

-
BlT6iiiin
To p't'/Gf on f oad" Ptgf tion

ToT-rov-gonf ortaxation

ToToss-on sate of investments

T ilos6il ssG;i shtet ryti
ttag
6prc'/Gron for legql c1319991

operation = Rs'3'70'000]
[Ans. Funds from

Hints.

(1) Provision for legal damages is a non-fun item'

(2) Refund of Tax is a non-operating income'
lllustration - 4
as on 31"rMarch'
,Funds from operations from the information given below
carcurate
1995.

(i) Net profit for the year ended

31"tMarch 1995' Rs'6'50'000

Rs'35'500'
(ii) Gain on the sale of building
percent has been written
books at Rs'1'80'000 out of that'10
(iii) Goodwill appears in tne
off during they Year'
the year'
been sold for Rs'6'500 during
(iv) Old machinery wofin Rs 8'000 has
to the general reserve fund'
(v) Rs.1,25,000 have been transferred t
and furnitur1 al20Yo
during the year on machinery
(vi) Depreciation has been provided
whose total cost is Rs'6,50,000'

291
Solution
Rs.
ti 6,50,000
f'let orotit toi ine year (as given)
: Non-tunO and non-operating items
debited to P/L AJc:
18,000
Goodwill written ott
1,500
Gi;n;ale;imftfi -
(Rs.8,ooo-6,500)
1,25,000
Transfer fo general reserve fund
@ C"lt which have been
1,30,000 2,74,500
9,24,500
GsslnonJu nd and non-oPerating
credited to P/L A,/c: aq. 4nn
Gain on sale of building
8,8S,000
Funds from operatiPns

Try Yourself - 4
Extracts from the balance sheets :

31" Dec.94 31'' Dec.95

Rs. Rs.
1,00,000 1,50,000

10,000
(i) Depreciation charged on assets
5;000
15,000
@lizatioifund
book value of Rs. 60,000 was sold tu
65,000
(ivF planiTarng;
ffiiite
(v) Intenm orvloeno Palo KS. lu,L funds from oPerations.

292
[Ans, Funds from operatton = Rs. 85,000]
lllustration : 5

From the following balance sheets and additional information given, you are required lo
calculate funds from operations for the year ended 1994.

Liabilities 'I OO? 1994 Assets 1993 19S4

Rs. Rs. Rs. Rs.
Share Capital 1,00,000 1,50,000 Lahd & 1,00,000 95,000
Buildings
30,000 30,000 Plant & 80,000 90,000
Machinery
Profit & Loss Ar/c 20,000 22,000 Stocks 70,000 1 0,000
,1

6% Debentures 80,000 80,000 Debtors 20,000 25,000

Creditors 65,000 . 58,000 lnvestments 10,000
-Provision for tax 5,000 10,000 Cash 10,000 10,000
Goodwill 20,000 10,0q0
3,00,000 3,50,000 3,00,000 3,50,000

Additional information's :

1. During 1994, dividends of Rs.15,000 were paid.

2. .Depreciation wriften off plant and machinery amounted to Rs.6,000. and no depreciation
' . has been charg6d on land and buildings'

3. . Provision for tax made during the year Rs.5,000

4. Profit on sale of machinery rs.2,000.

Solution
CALCULATION OF FUNDS FROM.OPERATIONS

293
 treated as a non-current liability'
1. Provision for iax has been
the year is :
2. Goodwill written ofi during

Rs 20,000'Rs' 10'000 = Rs'10'000

AlternaiivelY
LOSS ACCOUNT
ADJUSTED PROFIT-AND

OF FUNDS
SOURCES AND APPLICATIONS

SOURCE

Funds frorn operations

RedenrPtion of
preference share
capital

I
I
ot^-,Non-
i

I Purchase
assets
1

I
I
current I

I Poynl.nt of dividend
I and tax I
I

Non-trading Payments
I
I
I

294
Try Yourself - 5

and the additioi:llit:tt:''::::"en' vou are requrreo

Erorn the foltowing Balance sneets
year ended 31"rMarch' 1996'
to funds from operations for the
"ut.-riut" 1 JI
31
March March
March '1S96 1995
I iebilities 1996 1995
Rs. Rs.
Rs. Rs.
1,46,000 89,500
Share capital 1,30,000 1,00,000 Fixed Assels
Rct2ined Earnlnqs 34,000 29,000 lcss: deoreciation
10,000
Mortoaoes 30,000 20,000 G^oalwlll
10,000
58,000 62,000 InVCSTMCNTS
Trade creditors
ox^.+ ro'm tiahilitieq 27,000 35,000 (tr,taixetaute)
80,000
19,000 13,000 f:lnsino stocK
Accrued exoenses 54,000 50,000
nohinrS
r:aqh 18,000 30,000
2,98,000 2,59,500
2,98,000 2,59,500

Additional inf ormation :

year amounted to Rs'13'500'
1. Depreqiation provided during the
Rs'7'000
2. Dividends paid in 95-96 amounted to
year out of retained earnings'
3. Goodwill was wriiten off during the
Rs'35'000]
[Ans. Funds from operations =
(2) lssue ol Share CaPital

'|fduringtheyearthereiSanyincreaseinthesharecapiial.whetherpreferenceor
of shares is a source of funds'
. during the year' lssue
equity, it means capital nu"nu"n raiseO
asitconstitutesinnowottunds,EventhecallsreceivedfrompartlypaidShaTesconstitutean ot
that it is the net proceeds fr^om ttr:l:tuu
inflow of furans. lt should ui'o nu '"tutUered are issued at
of funds and hence in case shares
share capital which amounts to a source The same
shall become a source of funds'
premium, even the amouniot p'"rniut collected
it wilr not be the nominar varue.of
share+ut thq
is true when shares are irru"j u, oir*unt;
inflolr of funds' But sometimFS
actual realization aeAu"ting discount that shall amount to
"n"r must be t:"o*"d
.i"r". uru issued otherwise than in cash' the following rules ',
.-'.
as fully paid out of accumulated profits
(i) lssue of shares or making of partly paid shares
of funds'
in the form of bonus ihares is not a source

295
(ii) lssues of shares for consideration other than current assets such as against purchase
of land, machines, etc' does not amount to inflow of funds'
(iii) Conversion of debenturesor loans into shares al$o does not amountto inflow of funds.
ln all the three cases mentioned above, both the amounts invoived are non-current and
do not involve any current assets or funds'
(3) lssue of debentures and raising of loans, etc.
lssue of debentures or raising of loans (long-term), whether secured or unsecured
results in the flow offunds into the business, The inflow offunds is the actual proceeds from
premium or
the issue of such debentures or raising of loans, i.e., including the amount of
excluding discount, if any. However, loans raised for consideration otherthan a current asset
such as for purchase of building, will not constitute inflow of funds because in that case the
accounts involved are only fixed or non-current.
(4) Sale of fixed (non'current assets) and long'term or trade investments
when any fixed or non-current asset like land, building, plaint and machinery, furniture,
long{erm investments, etc. are sold it generates funds and becomes. a source of funds:
However, it must be remembered ihat if one fixed asset is exchanged for another fixed asset,
it does not constitute an inflow of funds because no current assets are involved.

(5) Non-tradingReceiPts
Any non-trading receipt like dividend received, refund of tax, rent received, etc. also
increases fundS and is treated as a sources offunds because such an income is not included
in the funds from operations.

(6) Decrease in working caPital

lf the working capital decr'ease during the cunent'period as compared to the previous
period, it means that there has been a release of funds from workinq capital and ii cohslilrrtbs
a source of funds.
APPLICATION OR USES OF FUNDS
(1) Funds lost in operations
sometimes the result of trading in a certain year is a loss and some funds are lost
during that period in trading operations. Such loSs of funds in trading amounts tQ an outflow
of funds and is treated as an application of funds.
(2) Redemption of preference share capital

lf during the year any preference shares are redeemed, it will result in the outflow of
funds and is taken as an application of funds, When the shares are redeemed at premium or

296
 discount; it is the net amount paid (including piemium or excluding discount, as the case may
be). However, if shares are redeemed in exchanges of some other type of shares or
. debentures, it does not constitute an outflow of iunds as no current account is involved in
that case.
(3) Repayment of loans or redemption of debentures, etc.
In the same way as redemption of preference share capital, redemption of debentures
or repayment of loans also constitute an application of funds.

(4) Purchase of any non-current or fixed asset

When any fixed or non-current asset like land, building, plant and machinery furniture,
long{erm investments, etc. are purchased, funds outflow from the business. However, if
fiied assets are purchased for a consideration of issue of shares or debentures or if some
fixed asset is exchanged for another, it does not involve any funds and hence not an application
of funds.

(5) Payments of Dividends and Tax

Payments of dividends and tax are also applications of funds. lt is the actual payment
of dividend (may be interim dividend) and tax which should be taken as an outflow of funds
and not the mere declaration of dividend or creating of a provision for taxation.
(6) Any other non-trading payment
Any payment or expense not relaied to the trading operations ofthe business amounts
' . to outflow of funds and is taken as an application of funds. The examples could be drawings
in.case oi sole trader or partnership firms, loss of cash; etc.

soME TYPTCAL tTEMS, WHICH REQUTRE PARTICuLAR CARE

The following items require particular care whiie preparing a funds flow statement.

(1) Digging out Hidden Information

While preparing a funds flow statement, one has to analyse the given balance sheets.
Items relating to current accounts, i.e., current assets and current liabilities have to be shown
.. in the schedule of changes in working capital. But the non-current assets and non-current

liabilities have to be further analysed to find out the hidden information in regard to sale or
purchase of non-current assets, issue or redemption of share capital, raising or repayment of
long-term loans, transfers to reserves and provisions, etc.

The hidden information can be digged out either by preparing working notes in the
statement form or preparing concerned accounts of non-current assets and non-current
liabilities. Both of these methods have been clarified in the following illustrations :

297
lllustration - 6
sheets of a company
The following information has been extracted from the Balance
31s'Dec. 1993 31s'Dec. 1994
Rs. Rs.

Machinery 80,000 2,00,o00

Accumu lated dePreciation 30,000 35,000
Profit and loss account 25,000 40,000

The following aclditional information is also available :

of equity sharet
(i) A mbchine costing Rs.20'000 was purchased during the year by issue

(ii)onJanuary,lgg4,amachinecostingRs.l5'000(withanaccumu|ateddepreciationt
Rs.5,000) was sold for Rs.7,000.

Find out sources/ application of funds'

Solution
ACCUMULATED DEPRECIATIONS Alc

Rs. Rs
5,000 By balance b/d 30.00(
To machinery A'/c
To balance c/d 35,000 By adjusted % p/" (lqlqgtlg tig!re)- 16"oo(
40,000 Zo^oo(

8% PREFERENCE SHARE CAPTIAL A/C

Rs
Rs.
1,00,000 By balance bld 2.00,00
To cash (application)
't,50,000 By castr-issue (balancing figure source) 50,00
To balance c/d
2,50,000 ZFdoo

lssue of equity shares against purchqsed of machinery is neither a source

r
application of funds. r

2. lssue of shares worth Rs.50.000 for cash is a source of funds'

RedemptlonofreferencesharesworthRs.l,00'000isanapplicationoffunds'

4. lssue of preference shares of rs.50,000 is a source of funds'

298
Try Yaurself - 7

Sheets
Extracts from Balance E6n so.0.tgso
IIso,, go.o.19e5
5fr66 Premium AJc 1,00,000
go/o debentures

Additional lnformation
the year'
worth Rs'30'000 were redeemed during
9.0/o debentures
of funds'
accounts to find out sources/ applications
,;orr" necessary
a sources of funds'
: o{ equity shares of Rs' Rs'1'00'000 is
[Ans (i) lssue
is a source of funds'
(ii) Sl^farc premium ot Rs'tb'ooo
worth Rs'30'000 is an application of funds'
(i) Redemption of debentures
of lundsl'
for Rs'80'000 is a source
(ii) lssue of debentures

2. lnvestments

ThetreatmentofinvestmentswhiIepreparingfundsflowstatementdependsupontneIr assets lf the

(ong-term) or non-current
ir6ture, i.e.' whether they "'"
i'l'"ti "t'"t" or fixed
in marketable or short-term
investments represent
,ril; ;; temporarily invesied
aut if investments are
lons-term' permaneni
securities, thev are to oe
trellj[";;;;;;;t';"tt'
these should be treated as fixed assets'
or trade investments'
invested in m'arketable
When the surplus funds are'temporarily
(a) Temporary Inveslments'
securities,theyare;;;;tcurrentassetsu"o'itn""srrowninthescheduleof
require anv rurther
rreatment
o;
changes in work'"n ;;fi;;;;;l*":'1::: ""t
like all other current assels'
*ti"tolot'i"n i'na'-ti"* statement

(b)Long.term,permanentorNon.currentInvestments.|ftheinvestmentsareofnon-currenr
account should be
'nature,thes".t,o,ro.ain",io*nlntr.,"".n"ou|eofchangesinworkingcapita|because
Ho*"u"'' inthis case' an iivestment
they are not current a-s'Jet'' to fino out tne cost of
investments
the oooks or u"tounit
prepared as it is pr"Jarelln of such investments'
sale
if
purchased ;;;t;;" 'n131"fit;;l;t;;
"to and the
"' """
any. Sometimes'
'"u' are purchased-"u*-OiulOunO
*" i""""*"*s -pre-acquisitibn

dividendreceived,,.Jiototheinvestme..u"."".t|fihereisaloss.onsa|eof
suchinvestmen"";;;";;;uno"oo"otopliLlc'itshouldbeaddedbac.kwhile
findinsfunds""*1;;;;;'l"r'o*nonthedebitsideofadjustedprqfitandloss

299
 account(dependinguponWhichmethodisfol|owed)forthereasbnthatSUch|ossisnot
if a profit on sale of such inveslments
an operating loss. However, for the same reason'
hasbeencreditedtoprofitand|ossaccount,itshouldbedeductedwhi|efindingfunds
profit and loss account. as tne
from operations or shown on the credit side of adjusted
case maY be.

Thepurchaseofnon.curreniortradeinvestmentsisanapplicatieloffundswhi|ethe
are a source of funds'
oroceeds realized from the sale of such investments

tllustration -8
Theextractsofaba|ancesheetrevea|thatthereisanopeningba|anceoftrade
of Rs'30'000' Rs'3'000 by way
investments amounting to Rs.20,000 and a closing balance
from pre-acquisition
of dividends have been received during the year including Rs.1 ,000
required to find cut the
profits which have been credited to lnvestments Account. You are
as application of funds'
cost of Investments purchased during the year to be shown

Solution

INVESTMENTS ACCOUNT

Alternatively :

Catculation of purchase of investments

Rs.
20,000
Ooeninq balance
-I *.' .ti.,i.tanrt hain.r nre-ecciuisition credited to 1,000
19,000
Investments AJc
30,000
Closinq balance
lo, *^r...^ ^f tn\/o<imontR drrrino the vear {balancinq liqures) 11,000

Try yourself - 8

Extracts of a balance sheet : 1994 1995

Rc KS.

Trade lnvestments 50,000 70,000

300
Additional Information ;

the year including rs'2'000 from

(i) Rs.5,000 by way of dividend has been received during
A'/c'
pre-acquisition profits which have been credited to investments
during the year for Rs 10'000'
(ii) Investments costing Rs.10,000 have been sold

Find out sources/ applications of funds'

IAns
received on trade investments is a source of
funds'
(i) Dividend of Rs S,OOO

(ii) is a source of funds'

Rs.10,000 realized from sale of trade investments
is an application of fundsl'
(iii) Investments purchased during the year for Rs'32'000

3. Provision for Taxation

There are two ways of dealing with provision for taxation

:

as it'
(i) As a current liabilitv'Provision fortaxation may be treated "t: ":'1:*]1:]lity
to pay tax to the Government'
generally, represents an lmmbdiate obligation of the company
appear in the schedule of
when it is treated as a current liabiliiy, provision for taxation will
no further treatment is required
changes in working capital like all other cunent'liabilities and
is no need to prepare the prgvision
while-pieparing the funds flow statement. In this case, theie
forTaxationaceountandthepaymentoftaxmadeduringtheyearsha||notbeshownasan
of tax
.ooio* or iono. n""uure inihat case both the accounts involved for the payment
paid during the year shall be :
shall be currenl accounts, e.g', the entry for taxes

Provision for taxatiqn AJc Dr. (already taken a$ Current Liability)

Td cash A'/c (Current Asset)

|tisclearfromtheaboveentrythaton|ythecurrentaccountsareinvo|vedandhence
there is no movement of funs (Working Capital)'

(ii) As on .appropriation of profits' When the provision for taxation is treated as an

appropriationofprofitsandnotaSacurrentliabi|ity,thenitShallnotappearinthesch.edu|eof
the year then shall be the
changes in working capital. Provision for taxation made during
be added back while finding
appropriation of profits made during ihe year and will have tb
profits and loss account is
funds froin oper'alions being a non-fund item' lf an adjusted
on the debit:i-de for the
prepared, provis[on for taxation made during the year shall appear
(not
i s?r e fo?sors. Moreover, tne taxes paid.during theyearshall be an application offunds
few statements on the application
ouing u.urrunt riabilitY) and will have to be shown in the funds
side.

301
 be prepared in case of hidden
A provision for taxation account may have also to
made during the year or the taxes paro
information, i.e., when the provision for. taxation
during the Year are not given
preferable to assume provision for taxation as
However, the students may note that it is
obliQation of the company to pay it and it
a current liabitity as generalty ii is an immediate
profits'
rarely represents an approprlation of

lllustration -I
account as on 1"rJanuary 1995 was
The opening balance In the provision for taxation
1995 was Rs'40'000 The taxes paid
Rs.30,000 and thl dosing balance on 3l"rDecember
with this item in the funds {low
il;; ,u* u*oun*i to Rs.25,000. How wi' you dear
staiement?
scHEDULE oF GHANGES ItlLryeEIlIe tl!l$!

of profits ;
(B)When provision for taxation is treated as an appropriation
in working capital'
(1) lt will not be shown in the schedule bf changes
(2)Taxespaidduringtheyeari.e.,Rs'25,000isanapplicationoffundsandwi||appearon
the applicaiion side of funds flow statements'
FUNDS FLOW STATEMENI
for the year ended 31.12.1995
Rs. Application Rs.
Sources
Payment ol IaX 25,000

shall have to be calculated

(3) Provision for taxation made during the year i'e ' Rs'35'000
on the debit side of adjusted profit
as below and it will be added nac[(or sha[ be shown
and loss account) while finding funds from operations'
year'
Calculation of provision for taxation made during the
Rs.
30,000
25,000
5,000
40,000
Ct*6sinq balance of provision on 31 '12'1995
35,000
Drnrricinn rnada dlrrino the Veaf

342
 OR
PROVISION FOR TAXATION A/c
Rs. Rs.
To cash (tax paid) 25,000 By balance b/d 30,000
To balance c/d 40,000 By adjusted P/L A/c (provision made 35,000
balancing figures)
65,000 65,000

Try yourself - I
Extracts from the balance sheets
30.6.95 JU.O.VO
Rs. Rs.
Provision for taxdtion (non-current) 50,000 75,000
Profit and loss PJc (Cr.) 2,00,000 3,00,000

Additional lnformation :

Tax paid during the year is Rs.30,Q00

Find out sources and applications of funds.

[Ans. (i) tax paid of Rs.30,000 is an application of funds.

{ii) Funds from operations of Rs.1,55,000 is a source of fundsl'

4. Proposed Dividends
Proposed dividend though shown on the liabilities side of a Balance sheet is not a
liability in real sense unit it is formally declared to be paid to the shareholders in the annual
general meeting of the Company. Till such declaration of dividends, it simply represents an
appropriation of profits and is like a reserye or surplus. But generally, declarations of dividends
pioposed by the directors are accepted in the shareholders meeting. ln thal case, proposed
dividend cannot be said to be and appropriation of profits as these become payable within a
short tinte after they are proposed. So there €re two alternaliveS to deal with this item in the
same way as that of provision for taxation ;
(i) A9 a current liability. When proposed divldend is lreated as a current liability it
represents an obligation of the company which is payable in a short period. Hence, it is
shown in the schedule of changes in working capital as a current liability and it requires no
furlher treatment in the funds flow statement.
(ii) As an appropriation of profits. When proposed dividend is treated as an
When
appropriation of profits it is not a current liability and hence will not be shown in the schedtuie
of changes in working capital. In this case, dividends proposed during they year, being an
appropriation, are added back (or shown on the debit side ofadjusted profit and loss account)
while finding funds from operations. Thus, dividends paid during the year represent an

?n?
applicationoffundsandhavetobeshownontheapplicationsideoffundsf|owstatement.ln
theabsenceofanyinformation'proposeddividendforthepreviousyearmaybeassumedto
bepaidduringtheyearandtakenasanapp|icationoffundswhi|etheproposeddividendof
lhecurrentyear,beinganappropriation,rnaybeaddedwhi|efindingfundsfromoperations.
lnanycase,thestudentsmaynotethatthetreatmentofproposeddividendismuch
Simi|artoiheprovisionfortaxationanditisa|sopreferab|etotreat.proposeoolvl!11aasa
cunentliabi|itybecausegenerallythedividendsproposedbythedirectorsareacceptedby
theshareho|dersintheAnnua|GeneralMeetingandthesebecomeiayab|ewithinashart
period.
5, Interim Dividend
Theexpression,interimdividend,denotesadividendpaidtothemembersofthe
companyduringafinun.iu|year,beforethefina|izationofannua|accounts.Thedividend
should
i.e., interim dividend
paid or declared in between ihe two Annual General Meetings,
.beaddedback(ordebitedintheadjustedprofitandlossaccount)whi|eca|cu|atingfunds
fromoperations,However,ifthefigureofprofitisiakenpriortothedebitofinterimdividend
thisadjustmentisnotrequired.Theinterimdividendisa|soanapp|icaiionoffundsandhas
to appear on {he application side of funds flow statement'
lllustration - 10
Extracts from the balance sheets
30.6.95 30.6.96
Rs. Rs.
50,000 75,000
Proposed dividend
2,00,000 3,00,000
P rof it a nd loss -A/91qiJ

Additional information
Dividend paid during the year is Rs'50,000'
Find out sources and applications of funds'

Solution
PROPOSED DIVIDEND A/c

2,00,000
1,70,000
3,70,000

304
 (i) Dividend paid Rs.50,000 is an application of funds.

' (ii) Funds from operations of rs.1,70,000 is a source offunds from operations.

Note. in case proposed, dividend is taken as a current liabilityand shown in the schedule
of changes in working capital payment of dividend of Rs.50,000 is not an application of funos
and no adjustment is required to calculate funds from operations.

Try yourself - 10
Extracts from balance sheets

1994 100(
Proposed dividend 80,000 1,00,000
Retained Earnings 30,000 4,00,000
Additional information

Dividend proposed during the year and debited to retained Earnings fuc ia Rs.1,00,000.
'Prepare proposed
dividend AJc and adjusted profits ant loss account to find oJt ,orr"u,
and applications of funds.

[Ans. (i) Dividend paid during the year Rs.80,000 is an application of funds.
(ii)Funds from operations of Rs.2,00,000 is a source of fundsl.

6. Provision agalnst current assets

Provision against current assets, such as, provision for bad and doubtful debts, provision
for loss on stock, €tc. may be treaied by any of the following methoda :

(a) The opening end closing balance of provision againsi current assets should be deducted
from the regp6ctive op€ning and closing balance ofthe concerned asset. The net amount
of the current assets should then be shown in the schedule of changes in working
capital. lt dees not require any further treatment in'the funds flow stitement.

(b) . The amount of the opening and closing balance of the current assets may be taken as
gross in thc schedule of changes in working capital, i.e., without deducting the amount
of provision. But, then, the opening and closing balance of the provision against current
assets shall have to be taken as a current liability in the schedule of changes in working
capital an it will not need any further treatment in lhe funds stdtement. t

(c) lf excess Brgvision has been created, it may be treated as an appropriation of profits
and should be added while calculating funds from operations. The amount of the excess
pro,vision will not be shown in the schedule of changes in working capital.

305
 DEPRECIATION.AS A SOURCE OF FUNDS

Depreciation may be regarded a$ the capital cost of an bssets allocated over the lif
the asset. In simple language, it means the gradual decrease in the value of an asset du
wear and tear, use and passage of time. In real sense, depreciation is simply a book er
having the effect of reducing the book value of the asset and the profits of the current year
the same amount. lt does not affect current assets or current liabilities and does not rbsu
the flow of funds or.to say more precisely it is a non-fund item. Hence, although deprecia.
rs an operating cost there is no actual outflow of cash and sq the arnount of the depreciar
charged during the year is added back to profits while finding funds from operations. E

then, is depreciation a source of funds?

COMPREHENSIVE TLLUSTRATIONS

(A)When only Balance Sheets are given .

lllustration * 11

From lhe following balance sheets of the company for the ending
31"r December 19,
and 31"tDecember 1994, prepare schedule of changes in working capital qnd a
statem€
'showing sources and application of funds,

?AA
 3i=rDecembE--
1993 1994 1993 1994
Liabilities Rs. Rs. ASSCTS Rs. Rs..
Share cap,tal 3,00,000 4,00,000 Ptant & Machinery 50,000 60,000
sunory
Creditors 1,00,000 70,000 Furniture & fixtures 10,000 15,000
PIL Nc 15,000 30,000 t'tock-in-trade 85,000 1,05,000
Debtors 1,60,000 1,50,000
Cash 1,10,000 1,70,000
4,15,000 5,00,000 4,15,000 5,00,000

Solution
SCHEDULE OF CHANGES IN WORKING CAPITAL

1993 1994

Increase Decrease
Rs. Rs. Rs. . Rs.
vr.r r nt tt rt!,Utt[s
\rafJl I
1,10,000 1,70,000 60,000
1,60,000 1,50,000 10,000
85,000 1,05,000 20,000
H 3,55,000 4,25,00a
egr rvrtt ||.tt, lIIeF
Sundry credito,rs-.--=----"- 1,00,000 70,000 30,000
2,55,000 3,55,000
1;q0, 000 1,00,000

3,55,000 3,55,000 1,10,000 1,'t0,000

TTATEMENT OF SOURCE AND APPLICATION

OF FUNDS
for the'year ended 31.12.1994

307
 Funds from opeiations Rs.
Balance of P/L A/c 1994 30,000
Less Balance of P/L A/c in the beginning
Of the year 15,000
Funds from operations {K nnn
lllustration - 12
From the folowing two barance sheets as on 3l.rDecember
1994 and 1g95, you are
required to prepare statement showing flow of funds :

December 31
1994 1995
Rs. Rs.
Cash
30,000 47,000
Debtors
1,20,000 1,15,000
Stock-intrade
80,000 90,000,
Land
50,000 6,000
2,80,000 3,18,000
Capital and liabilities
Share capital
2,00,000 2,50,000
Trade creditors
70,000 45,000
Retained Earnings
10,000 23,000
2,80,000 3,18,000
Solution
SCHEDULE OF CHANGES IN WORKING CAPITAL
for.the year ended 31.12.1995
1994 1995

Current asseG Rs, Rs. '

Rs. Rs.
Cash 30,000 47,000 17,000
Debtors 1,20,000 1,15,000
Stock-in-trade 80,000 90,000 10;000 5,000
2,30,000 2,52,000
Current liabilities
Trade creditors 70,000 45,000 25,000
70;000 45,000
Working capital 1,60,000 2,07,000
r\er Increase working ca-pital 47,000
'n 47,000
2,07,000 2,07,000 52,000 52,000

308
 STATEMENT OF SOURCES AND APPLICATION OF FUNDS
:for the year ended 31,12.199b
Source Rs. tions Rs.
tssue or snaiEiqpitil 50,000 Puicnase of .land 16,000
Funds from operations 13,000 Net increase in working 47,000
capital
63,000 63,000

lllustration - 13
' From the forrowing barance sheet of Mr. A, prepare
a schedure of changes in working
capital and funds flow statement
Liabilities vvo 1vv4 100e
I Assets 1994
Rs. Rs. Rs. Rs.
Capital 63,000 1,00,000 Cash 15,000 20,000
50,000 60,000 debtors 30,000 28,000
Trade creditors 42,AA0 39,000 Stock-in-trade 5s,000 72,000
Bank overdraft 000 25,000 Land 'and 80,000 1;00,000
buildings
O!itstanding 000 6,000 Furniture 15,000 10,000
Expenses
1,95,000 2,30,000 2,30,000

Solution
SCHEDULE OF CI{ANGS tN WORKING CAPITAL

1993 1994 e ffect on working capital

Rs. Rs. Rs. Rs.

15,000 20,000 5,000

30,000 28,000 2,000

?no
 55,000 72,O00 17,000
1,00,000 1,20,000
\-urrenr aD tltgs
|duc 9teot[ors
|
42,000 39,000 3,000
Bank overdraft
35,000 25,000 10,000
\JUruta urng expenses 5,000 6,000 1,000
82,000 70,000
vv ur tg capt[at (u.A.-u.L.) 18,000
^rr s0,000
Net increases in workiEiapltel s2,000 50,000 35,000 ss,000
FUND FLOWSTATEMENT
Sources Rs.Applications Rs.
r\drs|| tg or tong-Ierm borrowings . 10,000 Purchase of land & building
(60,000-50,000) J0"o0,J
( 1 ,00,000-80,000)
uares or lurniture (1 S,000_ j 0,000) 000 32.000
Funds from operations 37,000
52,000 52,000

Working Notes :
1. LONG-TERM BORROWTNGS A/c

To balance cld Rs.

biiance b/d
. 50,000
cash (balar 10,000
60,000
2. FURNITRUES A/c
'Rs.
Rs.
To balance b/d 15,000 Ey casn-sate (balancinO fioure)
5,000
Ey oatance cid
10;000
15,000
15,000

3. LAND AND BU|LD|NG A/c

Rs. Rs.
To balance b/d 80,000
to cash-purchbTes (bEia nciETs[6)- , 20,000 By balance c/d 1,00,000
1,00,000 'I,00,000

310

-
 4. CAPITALA/c
Rs. Rs.
To balance cid 1,00,000 By balance b/d 63,000
gy profit (balahcing figure)
37,000
1,00,000 1,00,000
In the case of an individuar the difference in
"apitarA,lc
inGeregffig-;;;ih"
eno
of the year is on account of profit or ross made during the year as no other information
as regards to diawings, etc. is given in ihe problem.
5 As there is no information as regards non-fund and non-operation
items, the profit
made during the year Rs.37,000 amounts to funds from
operanons,
l,lustration - 14
Prjie3f*iglEg:ggry:Ig$he fo[owins batance sheer of lndian xL Lrd
Irllritlies 1994 1993 Assets 1994 l .)
.r I'rl{, Capllal 545 545 Fixed assets 4,933 3,994
ffeseryes 2,459 1,660
!e ss : delreciation 1,927 i,65'i
3,004 1,1,VC 3,006 2,343
Lran runCg 2,796 2,295
5,800 4,500 Investments (long-term) 62
vurre'lI i,6Ditill..-tq 1,241 1,533
rrovtsions 434 327 Inventories 2;475 1,804
uebtors I 487 687
Cash & Eank balanG 512 844
Loans & advances 663 620
I,.+(C D,\'OU 7,475 6,360
Solulion
SCHEDULE OF CI{ANGES IN WORIGN CAPTIAL
s3 1994 Increase in Decrease in
workirg v/orking
Crrrrent.""^li capjtal
---*----
Invenlortes
-=__-
u e btors
1,804 27 'l

c;h tE; r.-"; 687 1,157 470

844 512 332
Lo a n s a n d ad va nceilJlii6!?-i6-
te rm
oi-ll'olE s20 663 43

3,955 4,407
__ ___.,,-v,,,!rve Prevr_ru 5 1,241 292
111ggg3g to be current tiabirili6I.-_ 327 434
w;;;;#
*-_:iJ:::J
1,860
2,095
1,675
2,7 32
107

637 637
2,7 32 1,076 r,076

.311

-
 FUNDS FLOW STATEMENT
(Rs.in lakhs)

Sources Amount Application Amount

Rs. Rs.
Raising of loans 501 Pu'rchase of fixed assets 939
4 n7F' Increase in working capital 637
Funds from oPerations
1,576 I R-7 A

Working notes :

(1) Calculation of raising of loans

Loan funds in the beginning of 1994 2,295
ffi 2,796
501
Loans raised during the year (balancing figure, i.e, 2'796-2'295)
(2) Calculation of funds from operations
Reserves in the beginning of 1994 1,660
Reserves at the end of 1 994 2,459
Profit for the year (2,459-1 ,660) 799
Add: Depreciation (1,927-1,1,651 )
276
1,075

OR
RESERVES A/C
Rs. Rs.
To depreciation 276 By balance b/d 1,660
(1527-1651)
To balance c/d 2,459 By funds from operations (balancing 1,075
figure)
. 7QR
2,735

{e) CASHAND BANKA/c

Rs. Rs.
To balance b/d 54,375 Bv bank overdraft 24,000
,,7,02,172
To debtors 8,99,390 By sundry creditors
i By expenses 81,295
I By fixed assets 40,000
I
I By balance c/d 1,06,298
I
t 9,53,765 9,53,765
I
r
312
I
I

L
 rssuE oF DEBEiJTRUES AT DtscouNT
when debentures are issued by company at a price less than its nominal
varue (face
value) it is said to be issued ai discount. For example, if a de.bentureot
public at Rq.9S0, n is issue at a discount. Here
n..t,ooo i.li.r"o to
Rs.50
company. As a principle of equity, it is desirable to write ", ";;
l;;;i;;';;, .,n"
off this r"rr. lt ir-" ."pit"]lo* una
until it is written off completery, it is shown on rhe asset.side
of balance sheet, uiroer the
heading 'Miscellaneous Expenditures', as a fictitious
assei. Discouht on issue of debenrures
account is supposed to be ailowed bn ailotment, unress, "-"
otherwi.., ,;.i;;;.
There is no regar restriction on issuing debentures at
a discount. The requisite entry to
be passed is

(a)

(b) "t9 Dr.

I
T0 debenture allotment A,/c

1,1998

1998
Dr.
KS. Rs,
60,000

|-lr 60,000

:313
 .Dr 20,000 30,000
Debenture aliotment account |
Discount on issue of debentures account
Dr | 10,000
To debentures allotment account
rRainn rllnlment monev oue and discount adjuskrd)
]:- -- - Dr 20,C,00 20,000
Bank account
To debentu re allotment account
lFlaind
\"- i,
2llotment amount feceived)
---'
Dr 10,000 10,000
Debenture final call account
fo 14'k debentures account
/Roinn firqi Rs.5 per debenture)
\-'"'v -' and final call due @
-- -
Dr 10,000 10,000
Bank account
To debenture final call account
(Being final and final call due @ Rs'5 per debenture

14% DEBENTURES ACCOUNT

Dr. Rs.
By debentures application account 6q000
To Balance 1,00,000
cld
By debenture allotment account 20,000

BY discount on issue of debentures 10,000

By debenture final call account 10,000

1,00,000
1,00,000

DISGOUNT ON ISSUE OF DEBENTURES ACCOUNT

fo 14ok debentures account

BANK ACCOUNT
Dr.
Rs. Rt
To debenture aPPlication account 60,000 By balance c/d ,000

To debenture allotment account 20,000

To debenture final call account 10,000

90,000 90,000

314
 (Extracr onlY)
BALANCE SHEET lExtract
ontYl

lLiabilrties 90,000
L--- 1,00,000
I Secured loans :
10,000
i. 1,00,000
debentures @ Rs So
fzoooJl% 1,00,000
I^^..t.

lllustration -3 . ,r. . ^..r-^^'.hart of 11 o0O debent

debentures of
made an issue' whichwas fully subscribed' ^f '000
A limited company subscriptions being
in"i"i".trr* were allotted on it",.luty 2001,
Rs.100 each at Rs.97. on allotment' 25 per cent
on 30s September
oavable 10 per cent on
""ll"ti.;;;;;"" "oo*#:;;"i"unt
on 3orh November 2oo1' 2001
of the issue' oaVment coylf be made in fully on 31"rJuly' '
Under ihe terms ot 10 per cent per annum; suqn
on anv amounts o*0"'l *"'n t'ily"lP:llT:*" the company
interest
the subscriber's payment, but was payable by
interest was not d eductible-fi; of the prepavment
TneliroiieJot soo oeu"J-tt'i3:i""r
on 30th November 2001. "duaniaje"
made in the gornpany's
iiJi-uu*JJd. Journalize the entries to be
terms, while oth"r. puiO
"n lnterest)
books; (lgnore Debenture

lc.B.S.E' 1992 (Delhi) (C)l

Journat

315
316
:Working Note :

Calculation of lnterest on Galls'in'Advance

I to
Rs.7,500 x il.!x -:--
tuu
= Rs.l25

Rcrrrioo"a*!=Rs.22o
t2 100

ISSUE OF DEBENTURES AT PREMIUM

lf debentures are issued at a price more than its nominal *l-u:
(f?::.ule)such as
issueiscal|edissueatapremium.Forexamp|e,ifadebentureofRs.l000isofferedat
premium. The excess of issue price over face
1 ,050, it is a case of issue of debentufes at
valueispremium.Thepremiurnisacapiialgainforcompanysoitistobecreditedto.premium
of debentures' premillm. on issue of
on issue of debentures account'. Like discount on issue
to the contrary is prgvided'
debentures is also realized at ihe time of allotment, if nothing
premium on issue is a capital gain, so it is shown on the liabilities side of balance sheet
under the head 'Reserves and Sur"plus''
The entries relating to premium will be :

(Total due)

(Amount of
premium)

regarding the
Nowhere in the companies Act have been provided. the conditions
of prgmium on debentures.
utilization of amount of prernium on debentures. still the amount
pfofit Arising from the
should not be transferred to profit and loss account because it l8 not a
normal operations of ihe company.

317
 premium may be tot writing off debenture issue
The amouni of debenture :':'"0
or alternatively it may
be credited to Debenture
on,."uu oi.,nures etc,
expenses, discount
(if any)'
redemPtion fund
at Premium
lssue of debentures
lllustratron-A
Rs.100each atRs,110 payable asfollows:
1,0006% debenturesof
O nyissued,
(including premium Rs'5)
Rs.30 on application
premium Rs'5)
Rs'30 on allotment including
call'
Rs.50 on first and final
Allthedebentu,u.*;,.appliedforandal|otted.Allmoneyduewasreceived,except
final call on 20 debentures'
the above'
Pass journal:entries for
SOLUTION:

30,000

50,000

49,000

318
 for a lump sum)
lllustration - 5 (lssue of de6enturEs

Journalise the fo[owings

i.io** b,ooo 7% debentures tt1" l:::i:::t::;
fi *'*;:;;o z% ouountu'"'
"
z% ountntu'"s or Rs'
I' l:::::::: X:::::.
100 each at 10% discount'
;i ''.*;:;;o par'
All the debentures are redeemable at
JOURNAL
SOLUTION:

319
 OTHER THAN GASH
DEBENTURES ISSUED IN CONSIDERATION
Sometimesacompanypurchasesarunningbusiness(assetsandIiabiIiiies)andissueS
debentures * .in.io"rution. lt is called issue of debentures in consideration'
to vendor,
entries are recorded'
*n"I. ,nun cash. ln such situation following
L When agru"m"ni of
purchase of business is signed;

Business purchase a/c Dr' with amount of

Sundry assets a/c Dr. Purcnase

To Vendor's a/c

(Being sundry assets Purchased)

paid io vendors in the form of debentures'
ll. When purchase consideration is
Vendor's a/c Dr. with amount of

To debentures a/c Purchase consideration

for assets purchasef)
(Being debentures issued as consideration .

Note:Whendebenturesareissuedinconsiderationotherthancash'iheycanoe
issuedeitheratpar,atpremiumoratdiscount.|ftheyareissuedatpremiumtheamouniof
preririumwi|lbecreditedto.preniiumonissueofdebenturesaccount'andifissuedata
,discount on issue of debentures u".ouot"..
;;; t" oi."ount will be iebited to , ,-,
'Asperru|epurchaseconsideration(amounttobepaidforassetspur.chased)should
beequaItoneiaSSetS(ASsetspurchased-|iabi|itiesassumed)value.Butinpracticesometimes
of:net assets'
sometimes it is less than the vaiue
it is more than the value of net assets and
Extrapaymentmadeoverandabovethevalueofnetassets,istreatedasgoodwi|l;
which can be calculated as follow :

Goodwill = purchase consideration - Net assets

Where Net assets = Assets purchased - Liabliiies assumeo

ol
paid by company is less than the value
In case the purchase consideration to be gain' which is
purchase consideration is a capital
net assets, the excess of net assets over
transferred to capital reserye account'
lllustration - 6
(Debenture issued in consideration other than cash)
the payment was mlde in cash and
th(
Z Ltd purchased building for Rs'2,20,000' Half of
at a premium of 10%' Pass the necessal
rernaining half by the issue of 12% debentures
journal entires. (C.B.S.E' 1995)
320
Working note :

Calculation of debentures to be issued ; ,

Rs.

''':
One half of amount payable in debentures
1,10,000
...: 110
Debenture price being Rs. 100 + 10% premium
No. of debeniures = 1,10,000 + 110 = 1,

Nominal value of debentures and deb' 1,00,000

.'.
10,000

lllustration -
RS'40'000 0f
StarAutomobiles Ltd. took over assets of Rs. 2,35,000 and liabilities of
Purchase
Ashoka Automobiles Ltd. for the purchase consideration of Rs. 2,20'000'
premium' Give journal
consideration was payable by issuiRg debentures of Rs. 100 at 10%
entries in the books of Star Automobiles Ltd.
sor ilrroN JOURNAL

321
Working nores
against net assets being valued
(2'35'000
The purchase consideration is Rs 2'20'000
of Rs' 25'000 is goodwill'
- 40,000) Rs. 1,95,000' The difference
Whendebenruresareissuedasaco||atera|securitytherearetwowaysoftreatment
in the accounting books'
debentures
No journal entry is made in ihe
account books at the time of issue of such
(i) sheet to the fact that
on the liabitities side of the balance
A note is appended ouro* tnlloun in the balance sneel
of debentures. This will be shown
i;;;;;;"" secureb by ihe issued
as follows : '

BALANCE SHEET (EXTRACTS)

sheet
appear on the assets side ofthe balance
The debentures suspense accountwill order
the loan is re-paid the entry is reversed in
and debentures on the liabilities side' When
to cancel it.
lllustration - 10 (debenturesissued as collateral security)
outstanding on 1't January' 1993' During
Acompany had Rs.5,00,000 6% debentures with
bank for which the company placed
the year company took a roan ol ns.t,oo,000 from
bank,debenturesforRs'1,20,000ascollateralsecurity'Passjournalentries'ifany'Alsc
Balance Sheet'
will appear in company's
show how the Debentures and Bank Loan
Solution : First Method :
as co||atera| Security, on|y the entr
No entry wi|| be passed for issue of debentures
for bank loan will be Passed i e'
Bank a/c Dr' 1,00,000 1
'00'000
bank)
To Bank loan a/c(Being loan obtained from

5ZZ
 BALANCE SHEET (Extract onlY)
Liabilities

6% debentures 5,00,000
(ln addition, debentures worth Rs. 1,20,000 given to bank as
collateral security)
Bank loan
(Secured against debentures worth Rs. 1,20,000 given as
collateral security)
Second Method
ln addition to entry fro bank loan following entry should also be
pd)nl'u.
^^^^^l ,

Debenture suspense a/c Dr. 1,20,000.

To 6% debentures a/c
(For the issue of Rs.1,20,000 debentures as collateral security for
a loah'of Rs. 1,00,000from the bank), , '

BALANCE SHEET

Liabilities Rs. Assets Rs

6% debentures 6,20,000 Debentures 1,20,000

(lncluding debentures for Rs.1,20,000 issued as suspense a/c
collateral security)
Bank loan 1,00,000
(Secured against debentures worth Rs.1,20,000)

lllustration - 11
A Ltd. secured a loan of Rs,1,80,000 from the Canara Bank by issuing 2,000, 15%
debentures of Rs: 100 each as collateral security. How will you treat the issue of such
debentures ?

[C.B.S.C. (Foreign) 1991 (CI

Solution
1. First Method(when no entries are passed in the books)

323
 AN EXTRACT OF BALANCE SHEET OF A LTS' AS AT."
Rs. Assets Rs.
Liabilities
1,80,000
Secured Loans :

Loan from Canara bank (Secured by the

issue of 2,000, 15%
Debenture of Rs. 100 each as
Collateral security
passed)
il. Second Method (when entries for debentures are
JOURNAL OF A LTD

L.F. Dr. (Rs.) Cr. (Rs.)

Farticu!ars
Dr' 2,00,000 2,00,000
Debentures SusPense AJc
To 1 5% debentures A/c
(Being the issue of 2,000, 15% debentures of Rs'100 each
as collateral securitY for a loan from a bank as Per board s'
resolution dated....)

AI.{ EXRACT OF BALANCE SHEET OF A L-TD. AS AT ...

Rs. Assets Rs.
Liabilities
2,00,000 Miscellaneous 2,00,000
Second Loans : .
Expenditure:
2,000, 15% Debentures of
Debenlure
Rs. '100 each (issued as collateral security) Suspense AJc

Loan from Canara Bank 1,80,000

(Secured by the issue of 2,00Q, 15%

debentures of Rs.100 each as collateral
security)

lllustration - 12
ALtd.issued5,000,13%debenturesofRs.l00eachatpartandrai;eda|oanof
How wil| you
Rs.80,000 from bank, collaterally secured by Rs'1,00,000 13% debeniures.
company ans
show the debentures in the Balance sheet of the company aSsuming that the
(Foreign)
recorded the issue of debentures as collateral security"in the books. [c'B.s.E.
1ee2 (c)l

324
Solution
AN EXTRACTOF BALANCE SHEET

Liabilities Rs, Assets Rs.

5,00,000 5,80,000

5,000 13% debentures of

RS.100 each issued at par '1,00,000

1 ,000 13% debentures of 1,00,000

Rs. 100 each (issued as collateral security)

Loan from bank .

(Secured by the issue of 1,000 debentures of 80,000

Rs.100 each)

cLASStFICATION FROM'CONDIT]ONS OF REDEMPTION" POINT OF VEIW i

Like issue of debentures at part, premium or discount the redemption of debentures
can also be :

(a) Redemption at par

(D) Keoemp on ar premrum

(i) lssue at par, redeemable at par

(ii) lssue at discount, redeemable at par

(iii) lssue at premium, redeemable at par

(iv) lssue at par, redeemable at premium

(v) lssue at discount, redeemable at premium

(vi) .
lssue at premium, redeemable at premium

. The study of above sets clarifies that debentures are redeernable wither at part or at
premium. How the debentu!"es'are to be redeemed in future is provided in the prospectus '

issued by the compqpy at the time of issue. Sometimes a company can also redeem its
debeniures by purchase frqni open market. Generally in such cases it is normally seen that
company buys them at below the par value, thus making profit on redemption.

325
 r-- r--,16'r rt nrrt and redeemabl e at par
JourRgl enrrle5 rel

(i) Dr.
(a)
Dt
(b)
-I

(ii) WT
pal Dr.
(a) Bank a/c .,-- ^^,r ^ri^r,.,ant a/c I tr

Dr.
(b)
j Discount on issue of debentures atc
lTo Debdntures alc - '--- - --- --------'-
'
al
(iii) When debentures are issueo Prvrrtru''

at Par Dr.
(a)
I
Di.
(b)

redeemao't ol t'".','"""'
.-.----...--..-_
(iVL Wiu.n issued at par and Dr. With nomlRar'
(a) Bank a/c value -
---.r'^r^+m6nr a/c-
To Debenture appllcartot.t -o'lY-:9"-::::::.- JDr. | (Nominal
value)
Debenture applicatlon alru
orrr
.
a'c
I I Differenceandrn
Loss on issue of debentures I llt"ru
To Debentures a/c a/c I I redemPtion
;;;;;il redemption of debentures
"t | price) |
I I (Nominal vatue)
I (amount
I
o{

r
(v) When issued at discount nr With acr :ua

(a) Bank a/c ,. a:^^ amount receivec

^^A -*^rmpnt a/c
(Actual receipt).
(b) (Difference rl
arc
I
Loss on issue of debentures nr issue ' an
To Debentures a/c a/c redemPtion
i +; ;;;;;; redemPtion bf debentures price)
(Face value)
With Premium)

326
 Thepointtonoteisthatpremiumonredemptionisapersona|accountbecauseit
debentures are iedeerned' lt is
represents ine extra liability which is to be discharged when
paid off. since company prgr.nises
recorded on the liability side of the balance sheet until it is
which is
i;;;; ;"t" at the time of redemption, therefore, there is loss of equal amount
is written off
O"f it"A to
,,loss
on isiue of debeniures a/c'. This loss on issue of debentures
portion appears on
grud;"rrv every year during the life of the debentures. The unwritten off
the assets side of he balance sheet under the head
'Miscellaneous Expenditure" as a fictitious
asset. . .

'Themechanismcanbeexp|ainedwiththehe|poffo||owingi||ustrations:
lltustration - 13
. Journalise the follqwing transactions : :
r

(i) A debentures issued at Rs'gSrepayable

95 repayable at Rs' 100'
' iiil n u"n"nture issued at Rs. at Rs' 105'
(iii) . A debenture issued at Rs. 100 repayable at Rs' 105'
(iv) Adebenture issued at Rs. 105 repayable at Rs' 100' i
Note : I

The face value oleach debenture is Rs' 100. [C'B'S'E' (Delhi set ll]
I
I
I
Solution Journal I
I
Particulars D ebit.. Credit I
Dat 'a.mount
e
Amount I
h( s. Rsi. I
95
......-.:::---+.-

(i) Bank a ccount

5
Discount on.jssue of debentures a/c
To debentures accou nt
(Being the.issue of a debenture of Rs:100 at a
.lia^.r nt o? 59.1
(ii) Bank account Dr. 95
:
Loss on issue of d.ebentures account Dl. 10
To debentures accounl
To premium on redempiion of debentures
account
(Being.the issue of debentures of Rs, 100 at a
.liscount of 5o/o reDavable at a premium of 5o/o)
(iii) Bank account Dr. 100
Loss on issue of debentures account Dr. 6
To dbbentures accounl I
To premium on redemPtion .of debentures
account
(Being ihe issue of debentures of Rs. 100 at a
discouni of 5yo reDavable at a preinium
t
(iv) Bank aocount Dr.
To de be ntu res bccou nt I
(Being the issue of a debenture of Rs.100 at a
orsmium of 5% repayable at Par)

.327
 redeemed at premium)
lllustration - 14 (lssue at discount the condition
rs'100 each at a discount of 10% with
PLtd., issues 7,000 debentures of years'
preJnium of 5% afier the expiry of three
that these shall be redeemed at a
debentures
for the issue and redemption of these
Pass the necessary journal entries
after the expiry of three years
(C'B'S'E' 1993)

Solution Journal of P Ltd'

Working Note :
Rs-
70,000
Loss on issue of debentures
35,000
Discount on issue
1,05,000
Add: - premium or redemPtion
lllustration - 15
at a discount of 5% redeemable
I A company issued Rs', 1,00,000' 15% Debentures
i entry'
after 10 years at premium of 10%' Pass iournal

i tc.B.S.E. 1991 (Delhi)l

328

L
Solution journal

L.F. Dr.Rs. Cr. Rs.

Dr. 95,000 1,00,000

Bank AJc
ur. 15,000 10,000
Loss on issue of debentures A,/c .

To 15% debentures
.To premium payable on redemption of debentures AJc

(Being the issue of debentures at discount of 5% and

redeemable at a Premium of 100/o)

lllustration - 16

Journalize the following transactions :

(a)XLtd.issuesRs.2,00,000,12%Debenturesatdiscountof5%redeemab|eatpar.
(b)YLtd.igsuesRs.S,00,000DebenturesatadiscountofS%redeemab|eatapremium
of 7% [C.B.S.E. 1993 (Delhi) lll]

Solution Journal of X Ltd.

Particulars
Bank Alc 1,90,000 2,00,000

DiscouRt or1 issue of debentures A/c 10,000

f o 12% Debentures fuc

(Being the i6sue of 12% Debentures at a discourit
of 5% rededmable at Par)
Journal of X Ltd.

Bank A'/c 4,75,000 5,00,000

Loss on issue of debentures A,/c 60,000 35,000

To debentures AJc
To premium on redemption of debentures AJc
(Being the issue of debentures ai discount of 5%
and redeemable at a Premium of 7%)

329
lltustration - 17 journal entries how to record the following
show by means of '
You are required to
issues: pf rs'100 each at a discount
of 5% to be
debentures
o) A company issued 14'000
;;;:;;'-"t the end or 5 Years'
of Rs'100 each ata
discount of 5olo repayable
debentures
(ii) A comPanY issuec
i5'000
(outside Delhi) (c) 1ee6l
at a premium '';1;";; ;i oiu v"u" tc'J's'E'
"'
Journal

5,00,000

'330
 L.F. Debit.Rs. Credit.Rs.
-r_g:.!*:j-= - ,
Dr. 1,00,000 1,00,000
lssued at Par' redemption at Par
Bank a/c
To clebentures application & allotment a/c
(Being application money received on
debentures) '|,00,000
Dr. 1,00,000
Debenture application & allotment a/c
To 12% debentures a/c
(Being applicaiion money transferred to
,^l-.^n+,!r6a .^^.rr tntl
Dr. 90,000 90,000
h lssued at discount, redemption at par
Bank a/c
To debentures application & allotment a/c
(Being application money received on
debentures)
Dr. s0,000 1,00,000
Debenture application & allotment a/c
Dr. 10,000
Discount on debentures a/c
f o 12% debentures a/c
(Being application money transfened to
.r^h^hr, ,'aa r.....n, rni and discount ChafOgd)
Dr 1,05,000 1,05,000
lssued at premium, redemption at par
Bank a/c
To debentures application & allotment a/c
(Being application money received on
debentures)
1,00,000
Debenture application & allotment a/c
5,000
To 12% debentures a/c
To premium on issue of debentures a/c
(Being applicition money transferred to
;6h6n+r rr6c and nremir rm account)
Dr. 1,00,000 1,00,000
.l lssued at par, redemption at Premium'
Bank a/c
To debentureb application & allotment a/c
(Being application money received on
debentures)
Dr 1,00,000 1,00,000
Debenture application & allotment a/c
Dr 10,000 10,000
Loss on issue of debentules a/c
To 12% debentures a/c
To premium on redemption a/c
(Beinq application monejl{qlsfelregl-

JJI
 payable on
on issue of debenture consists of discouni on issue and premium
Note : Loss
redemption,|tisacapita|rossanowittbeshownontheassetsideonBa|anceSheet.|twil| Balance sheet'
The balance will continue to appear in
be written off over a nuro"r:ot f"urr.
lnierest on Debentures
.|nterestondebenturesischargbdtotheprofitand|ossaQcount.Whi|epayingthe
the income
of tne cofnlfV concerned'to deduct
interest on debentures, it is the obligation journal entries are
making paymenr of intere"st to cebenture-holder. The following
tax before
passed in this connection :

the debitside of piofitand lo::-"i"^:tJh"

lnterest on debentures is transferred to
crbdit balance of lncome tax ;;;;ffi;ilt :ilffion f'* ri'niritiuu
'
ril;t;;;
*::t'*-?"lTt"::i"'":iiffi'
L a nk a ccou n t wi I be
::T [?1i li'*"iff 1T il:.'x",',jHil i'"#' i

":
credited.
Debenture interest given in the tribal balance
preparino final accounts must be noted
The treatment of debentures interest while if the trial
carefully especially when ,, i; ;;;-t i;iut. a-t u'3n"9'1"i rate' For example'
then the profii and
.
,,hatf r.ru lax at 42ok rs.5,800"
balance shows v"ur,, o"ul'ntri"lnLr".tt

will be debited with the '--

gross amount b' tu'uuu [''u"''*000try)
^-^"^* Rs' "'nnn ('- ''-"" 58 ) - Rs'
and
loss account

,5JZ
4,200 will be shown in the balance sheet as liability under the heading
[,.,.,ffi.r0,000)
income tax payable account.
Redemption of Debentures
Redemption of debentures refers to the discharge of liability on account of debentures.
The following three problems require attention when a company wants to redeem the
debentures.
(a) Time of redemption of debentures. Generally debentures are redeemed at the
expiry of their period by making the payment of the amount promised fro. But
sometimes, cgmpany may reserve the right in the articles of association to redeem
the debentures even before the date of redemption either by installments or by
purchasing them in the open market. Payment of debentures by installment is nothing
but redemption of debentures by.drawing a lot' Sometimes a company does not want
to serve a notice with the debenture-holders and wants to redeem the debentures
before the date of redemption. This is possible by purchasing out own debentures in
the open market. Thus debentures can be redeemed either at the expiry of period of
debentures or before the expiry of the period by drawing a lot or by purchasing in the
open market before the expiry of the period of debentures.
(b) Amount lo be paid on fedemption. The amount to be paid on redemption of
debentures depends on the circumsiances of each case. lf the debentures are
redeemed on the expiry of the period or only during a lot, then the amount to be paid
can be either at premium or at par as promised by the company. lf the debentures are
redeemed by purchasing them in the open market, then the amount to be paid depends
on the market quotation, i.e., either at par or ata discount or at a premium. Generally,
the companies purchase their own debentures from the market when the dpbentures
are quoted below face value to take the advantages of depressed prices.
(c) . Sources of Finance. The major sources wherefrom the debentufes can be redeemed
may be (i) out of profits, (ii) out of cppital, 9iii) out of provisions made for redemption
and (iv) by converting them into shares or new debentures.
(i) Redemption out of profits
When debentures are redeemed out of profits, the following journal entries will be
passed.

(a) Entry for amount paid on redemption

Debit debentures account
Credit Bank
(b) Entry for transfer of profit
Debit proiit & loss appropriation acbount
Credit debentLlre redemption reserve A,/c

???
 to Generat
is not required for
redemption and is transferred
Nc
(c) When balance of D'R'R'
Resenve Accounr
reserve accoun('
Dbbit debenturg rtrednpticn
purposes'
wirrbe avairabre for arr
is'a free reserve arrd
nTJ;:: illll'l''"'""
rhe effoct of redemption
of debentures'o:]
:li'::i::';Yil:::trJ.l1,ITHff":
divideird wnr(
profits {rom distribution as
oail of the;i;hle
'nr"'rrt a source of internal financtng'

"*"'";l;;nuary, ee7, a comnanyissue:::3,*;,t"t,'lJ.l;,1"f#ff T..:j" ff::i:l

1

,"ourui'. rniiuu v"l" u'p::"tfJ,:111['iJll'i'1,lll!, ;nL'in,",.u,,was

pavabre harr
dulv paid'
Rs'2'00'000.in, TI]"":li]#;;;r
yearly on 30'h June ano
r--
r and the same was
at a cost
Rs.2,00,000 debentures
the company.pu:y::: uptQ 31"r
on 31"iDecember, 1997, books of the company
*as out or
or n, g r, o oo : | ":' j::".il:,3s'::1ffi:
i L':? ;#il',J0"'p,ion'
il'h",1
clusrr rg.s' rL' 'v- - '
December, 1997 includlng
t.ti.' t^i"ttuo e'co*"
Madurai) .-:, ^^r.i^e
Journal entries

.334
(ii)RedemPttion out of CaPital
lfdebenturesarereoeemedoutofcapita|,noamountofdivisib|eprofitiskeptaside
may So
for redemption of debentures 3:rd
for redeeming debenturesProfits are not utilized
totheshareholdersbywayofdividends.Redemptionoutofcapita|reducestheIiquid.resources
may adopt this method only when it has
available to the company. rn"'"to'u, a company
suflicient tunds
a company had:!o,create O:f::t""
According to the guidelines issued by SEBI'
RedemptionReserVeequiVar.n,ttosoy"ottneamountofdebentureissuebeforeredemption
ofdebentUrecommences.Thusiaccordingtothisprovisionredemotionofdebentureswho||y
of deberyt'r:eYRedemption Reserve is
out of capital is now not por.lltu. Howerlr, creation
not required in the following cases:
(i) Debentures with a maturity of 18 months or less'
(ii)Ful|yconvertib|edebentures.|ncaseofpart|yconvertib|edebentures,Debenture
RedemptionReserveistobecreatedforthenon-convertiblepartinthesamewayasapp|icab|e
for fully non-convertible debentures'
journal entry is madi:
when debentures are redeemed out of capital the following
Debit Debentures Account
redit Bank'

Whendebenturesarereduced.outofcapita|,nominalvalueofdebentureredeemed
isnottransferredfromprof'itandLossAppropriationAccountorDebentureRedemption
Reserve Account to General Reserve'
the following two enlries are
Sometimes instead of passing one entry given above'
passed:
(a) Debit Debentures Account
Credit Debenture-holders
(b) Debit Debenture-holders AJc
Credit Bank'
qnpaid to debenture-
This method is preferable, as it does not mix up the amount
holders with the debentures account'
lltustration - 8
debentures out of
A Company on 31"t December 't 996 redeemed Rs' 10'000 6%
redeemed Rs' 15'000
capital by drawing a lot. Similarly, the company on 31"t Decernber'1997
to pass iournal entries in the
6i deb;ntures out of profiis Uy Orawlng a lot' You are required
books of a company.

"?6
Solution

illubtration -9 of Rs. 1,000 each ait

issued 1'00^0.6Y0- debentures
On 1d April, 1994, a cornpany
^
Rs.e50.rermsori'suuproviolli#tt;"n:*;;-in:]:.Y:"^'1ee7Rs'50'000ordebentures
shourd be redeemed
"ith*
;;;;n: 1 q;*,:: :l ::f iJJi' ll3
*ff iH:I3[i,lll?
o'1;yr""n
:::,u;illx:T'-?1",JJ#JlT.',f 3l"xll":,.-'TJ;ffi ':'"il""f
atme eno oitrre year uy orawings'-on 31"'
1997 the debentures to De;;;;;;;
repaio
so o"ntn"t"t':: t1"^11:n ot'* "
March, 1ti9e t'u to*punv ii'iJn'#i'i'o ""ns"lratio" income-tax'
is payable ydarry; rgnore
rs.g'., the expenses o","n"orliJoa"terest on 31"t
the Balance sheet (as far as ii relates to debentures)
Give Journal entries and
march' 1998.
 Profit % loss account
AJc
To debenture issue exPenses
To discount on debentures A/c
anci discount
(Being the debenture is-sue expenses
on debentures written
lnterest on debentures A/c
To Bank
(lnterest due on debentures for one
debentures Alc
lnt"t"tt on debentures
lnterest A/c
To Bank
Inreresr o n dg ben!gre9-q!9&L-9!9
Profit & loss Fr/c
To discount on debentures A/c
j9!94!-199
Amount written o{9!!E99ujp!
Gterest on debentures Ai c
To Bank
(lnterest on de!g!lUes:9!el9r 9v/!
Profit & loss Account
To discount on debenture AJc
6% debentures AJc
I o banK
worth Rs'50'000 by
iReOemption of debeniures
drawinq ai Par
6% debentures A/c
i" pr.oiO. t.o"mption of debentures AJc

To Bank
l() Ddl lN
market at
(for the purchase of 50 debentures in the
Rs.9B0 Plus Rs.100 for
Mar.31 lnterest on deben[ures fuc
lo banK
lnterest @ 6% on Rq.950,000 for one 10,000
Mar.31 protit on redemption of debentures A/c
Profit and loss account
To dlscount on debentures A/c
(The writing off Rs 10,000 out of debentures
the same
discount and also utilization of profii for

Balance sheet as on March 31r 1998

oOO OY" Oeoentures of Rs 1 ,000 each
lllustration - 10
,ree6 Naveen Ltd. made an
on 1dApr' '':-11.3j:^o;3lir]?J;:;?i.,ii:?il:5::ol:33
:il::il:f *fi 'rrgnff l"'ffi :ll:i1iTiil'i##,:r."*:*'r:::,1
option Prorit on redemption', l:i1!,;;;;.1;,erestondebentures
il:;;;; "otpbnv'"sotpunv'' ends on '
i;;;;;.;"'"t"rn" i"::-'ll'::5r
ano o r- rvrorvrr'
is payable on 30'h Sepiember discoun'
the companywrote off RsJ '00'000 from debentures
year 1997-98'
During the fro cancellation debeniuret
same financialyear' the company purchased
account. Durihg the
of the face vdlue of:
pei debenture on 30;09'1992
(i)Rs.30,00,000 at Rs'960
per debenture on 31'03'1998'
(,,)*..rO,OO,OOO at Rs 970
for the year ending 31
items will appear in th: tii:ltl:l,t"tements
Show how these 31"r March 199;
i'gu'"t rof ttre preuious year ending
March 199B.Also "no* "o"Jtooniing
Solution. Some Basic Galculations
1997
on debentures for the year ending 31"r March
(1 ) lnterest
face value debentures
t

of Rs'l'000 each i'e'' Rs'50'00'000

On 50,000 debentures
tz:i i Rs'60'00'009
"'= year ending 31"1 March 1998
(2) Interest on debentures forthe 199i
12"!'^p^::*6 months ending 30 September'
On Rs.50,00,000 debenture @
Rs.30,00,000
p a' for 6 months endhg
On Rs.4,70,00,000 @ 12%
Rs ?8'20'000
31"iMarch, 1998
1997-97 ds 58'20'000
year
lnterest for the financial
of debentures
(3) Calculation of profit on cancellation
On Rs'30'00,000 @ Rs 40' Per

40
1'20'000
Rs. 1,000 i.e..ro,oo,oooxffi
On Rs'20,00'000 @ Rs'30 Per
30
n^n i.e..20.00,000x -:--
f\i. .r rvvw
r'^ l,uuu
60,000
1,80,000
of debeniures
Total profit on cancellation
debentures @ Rs.20
10'00'000
(4) Discount on issue of 50'000

338
 1998 (Extracts)
Balance sheet of Naveen Ltd' as on 31"t March,
31.3.98 31.3.97 ASSEtS 31.3.98
31.3.97 Liabilities
Rs. Miscellaneous Rs.
Rs. Reserves &
Expenditure
surplus
Capital reserve
(to the extent
not written off)
secured loans
1,80,000
Discount
12%
5,00,00,000 debentures on lssue of
4,50,00,000 Debentures
10,00,000 9,00,000

31"! March 1998 (Ertracts)

profit and ross account of Naveen Ltd for the year ending
1997-98 1996-97 1997-98
1996-97
Rs. Rs.
Rs. To interest on debentures

60,00,000 58,20,000

(iii) RedemPtion bY conversion

given the option to convert their
Sometimes the debenture-holders of a company are
debentures into the snares or new debeniures within
a stipulated period such optiott, is
very sure about the progtress oJ the
exercised by the debenture-holders only when they are
company.Thenewsharesordebenturescanbeissuedeitheratpartoratapremiumofata
discount. The following entry will be made :

Debit old debentures account

Debit discount on the issue of share/debentures
Credit new share capital/debentures account
Credit premium on the issue of share/debentures'
lllustration - 11
On 1'r April, 1997, Y Ltd. issued debentures of rs'1'000 each at Rs'950
SOO 12%
into 6% preference shares
each. Debenture-holders had an option to convert their holdings
ofRs.l00eachatapremiumofRs.25pershare'on31"lMarch,1998,oneyear,Sinterest
paid. A holder of 50 debentures notified his
had accrued on these Debentures which was not
intention to convert his holding into 13% preference snares'
Journalisetheabovetransactionsanddrawthecompany'sBa|anceSheetaSat3l"l
March. 1998.

l
Solution

1997
Apr.1

Balance sheet as on 31"t

March' 1998

.340
lllustration - 12
on 31"r March' 2000 was as follows:
The summarized Balance sheet of X Ltd' as
Rs, Asses Rs.
Liabilities
Goodwill 40,00,000
Share CaPital
Fixed assets 82,60,000
40,000 1 3olq redeemable
Stock 90,00,000
Preference shares. of
40,000 Sundry debtors 43,00,000
Rs.100 each fullY Paid
Discount on debentures 2,40,000
Up redeemable at Par
' 80:Q0.000
8,00,000 EquitY shares of
Rs. 10 each fully Paid UP 1,20,00,000
I

| 127o debentures.
I. 60,00,000
I (Redeemable at Par)
I

50,00,000
I Proiit a loss AJc
I
10,00,000
I BanK loan
I

Sundry creditors ,
1q.00.000
I
I 2,58,00,000 I
I

Thecompanydecidedtoredeemthepreferencesharesanddebentur-esandindue
,courqe offered to tnl preterente snarenotOers
and debenture-holders the option io convert
iheirho|dingsintoequityShareswhicharetobelreatedas.worth'Rs.12.50each.onehalfof
(in value) agreed to
the preference shareholders and one third of the debenture-holders
accept the offer.
Rs'1250 to the p{blic
The company issued 0,00,000 equity shares of Rs"l0 each @
and redeemed the
for cash anO witn the proceeds of 'such issue, paid off the bank loan
remaining preference shares and'debentures'
Sohition
In the books of X Ltd.
. Journal entries

12% debeniures AJc .

Dr.. Rs.
60,00,000
1o 12% debenture-holders Fy'c

(Being amount payable n redemption of 12%

.{6hanfi rrpc\
uE99l rlLrre9,,

341
il
ffi.a"^rtion
fiffi:1. :
* *":t::.
si,rgqggrygg*gffi
out

li*1ill;#il'Jll::l ..
;il:*;l;:**t$iil$ffi ^".n,,".

t-"^'"11,1'Jl'."Stil"j;HH; :fir#frit:**"titr:ft;
il*:"'J"ffi'"TJ ;:Tffi ; w'r be Passed :

At the end of
the 1s Year
set aside every
year
; For the amount Dr'
account
Profit & loss appropriation
'To Sinking fund
account "

Or
fund account
Debenture redempiion
ti1;iooon invested in securities
(ii) For amount kept ";i"
"taccount
Sinking fund investment

342
 '.'.'

Dr
(iv)
::::ff[:J;H::Jili"x''"1'[:Ti,':
general reserue
io
jl:';l;"JTj:
"'"*'";;;;lllli,Jljixl"fi::::t j";"i,.:?:":l:lfi Ji:tr'li::'
onthe investments
ilr:"T"tJ'n:l3J'"d:.. inrerest received

ffi
assumins rharrhe

',':!,ffi "ears,

[L#*tti**'r*$lili**xi*1,
:",i["J:'.ffi ":^Ti":J'*l'-ll#":i::*:ixTfi'J"i'Jotsv'u"
solution required (nearest
, one rupee,
rhe annttal amount l:*11*,fi,000
is' 1809i
= Rs.18'098
the an'iut u*ount '"quired
. . For Rs' '00'000'
1

rupee). Journal Rs.

1,00,000

1B,O9B

18,100

344
,2 AA
 in multiples of hundred'
Note lt is assumed lhat investments have been made
insurance PolicY method
Sinkingfundinsurancepo|icycana|sobetakentomakeprovisionforredemptionof
premium is paid every year to the insurance
debentures. Under this method a fixed amount of
companywhichintulnagreestopaythenec€ssaryamountforredemptionofdebenturesat
the end of a specrfic period
Journar Entries
First Year

(i) For amount of premium appropriated from profit and

loss account
Profit and loss appropriation account
To debentures redemption fund AJc

(ii) For amount of premium paid to insurance company

Debenture redemption fund policy A'i c Dr.
To Bank
year also'
Note. These entries will be passed every year including the la-st
period on realization
The following entries will also be passed atthe end of the specific
of tho policy :

(i) For the amount received from insurance Co,

Bank account Dr'
To r:e-demption fund PolicY A/c

For he.balance of debenture redemption fund policy account

(excess bnidunt received)
(ii)
- transferred to debenture redemption fund account
Debenture redemption fund policy AJc
To debenture redemPtion fund A'lc

(iii) For bmount paid to debenture-holders :

Debentures A/c Dr'

To Bank
(iv) For balance of debentur'e redemption of und account transferred to
general reserve
Debenture redemption fund account
' To general reserve

lllustration - 18
A|imitedcompanyhasmadeanissueofRs'5,00,00097odebentureson1"lApril'
1996, the terms of which include that the company musttake a 4 years sinking fund
insurance
policy for the redemption of debenti:res at a premium of 57o. The annual premium ls
Rs.1,15,000..The value of the policy increases each year by 6Yo'
yeat.
Give the necessary Ledger.Accounts to record the above transactions lor 4

347
Solution
Sinking fund account

(- 6\
l' ,03,08 I x --.1
 Sinking fund insurance policy.account

1996 Rs. 1997 Rs.

April 1 To Bank Account 1 ,15,000 Mar.31 tsy Balance c/d 1,21,900

1997

Mar.31 To sinking fund Account 6,900

(lnt.)

1,21 ,900 1,21,900

1997 1998
April 1 To Balance b/d 1,21 ,900 Mar.31 By Balance c/d 2,51,114
April 1 To Bank Account 1,15,000
1998

Mar.31 To sinking fund A/c (lnt,) 14,214

2,51,114 I F,4 414

1998 1999.
April 1 To Balance b/d 2,51,114 Mar.31 By Balance c/c 3,88,081
April 1 To Bank Account 1,15,000
1999

Mar.31 To sinking fund Account 21,967

(lnt.)

3,88,081 3,88,081
1999 2000
April 1 To Balance b/d 3,8S,0"S1 Mar.31 By bank Account 5,33,266
Aprii 1 To Bank Account 1,15,000
2000
Mar.31 To sinking fund account 30,185
(lnt.)

c,oo,zoo 5,33,266
 nt
60/" debe nture accou Rs.
--l I

_---------- leeo I

2000
Rs. r-------"'1-
IApril 1 il" 5.00,000

To lJattn n'--- .'^c 2cc'Oulrl

-...-
Mar.31 Ition of dePenrt" '-
on redemf

}UEii t tutr" bre correct

:
taternents
foltowins sra...
1. Which of the of the companv'
;;:;;'
(a) A debenture'holde o
. d- -r, m^nev back only
(b)

(d)

(e)

(0

(b)

(c) ,

(d)

(e)

(f)

(s) Fiist deben'

(h) RegisPreo
 (i) A cotnpany cannot buy its own dobentures.

(j) In case of debentures if the quotation is cum-interest it means that it is with interest
and for recording purpose interest is added to the total price paid'

Ans. fTrue: (a); (e): (f); (g)1 False: (b); (c; (d);(h); (i); (jI.
3. What do you under$tand by a debentrure ? Describe briefly the different types'of
debentures.
4. What is debenture stock /
5. Distinguieh between : (i) a debenture and a share, and (ii) debenture and debenture
stock.
6. Give different considerations for which debentures may be issued'
7- Write notes on : (i) Debentures Discount, (ii) Debentures as Cbllateral Sequrity, (iii)
Interest on Debentures, (iv) Ex-interest nad cum-interest, (v) own D.ebentures.
B. Discuss the varioue;journal entries which are passed in the books of a company.when
provision is made through sinking fund or insurance policy for the redemption of
debentures.
9. What are the various methods of redemption of debentures?
10. What are the alternatives available for making the provision for redeeming debentures?
ls it necessary to make such provision ?
11. Explain (i) redemptlon of debentures out of capital and (ii) redemption of debentures
out of piofit. - ' i
PRACTICAL PROBLEMS

1. A limited company issued 1,000 debenture bonds of rs.100 each at a premium of 10

per cent repayable at.part atthe end of the 10h year. The debenture bonds were payable
25 per cent on applicition, 35 per cent on allotment (including the premium) and the
balance on first and final call. All the moneys were received by the company in dub

You are asked to journalise the above transactions in the bookq of lhe company'

2, A limited company issued Rs.1,00,000 debentures, which were issued as follows :

1. irl To sundry persons for cash at 90 per cent I Rs. SO,OOO nominal
Z. I lo a cieditor for Rs.20,000 capital expenditure in I ns. ZS,OOO nominal
satisfaction of his claim

3. I To bankers as collateral seourity I 25,000 nominal

351
 rhe issue (1) and (2)
are redeemabr-e-1^ti""^"J"1""#t 1".*
in preparing th€ Datattr'v '""'
o' tlff:ffX":1""''
dealt with
the debentures be l^ ' n ooo tti
"'
3 Naveen Ltd ,ssue:*
l:,.1;; l:"ffi[:
rr I dr rt ruqr^]l-'^,i
]i:',:.lltfill"i:il'#*'.T i:::ffi::
of 5 per cent repayaole * Decet
December.
The company's year ends on 31't",1
following'
transactions foi-f:u: v::::^eli:[*l llil;iilTilse
Journa[ze the above o
oecided to write of{ debenture "3'"""'"J:li
that the company
debentures'

Ans.[DebentureDiscountlJcwrittenoff:1994Rs'2'000;1995;1996rs'1'000;1997Rs500]
4. A co m panv i ssu e s
Rs 1' 00' 000 l 9 eT:€::.d::"Iffi
t ::;l|fl i":;t"l"it i:
of 5 percent repayable
in annual drawings
""';;u;;;;r'vso" "-
The financial year of lhe
of discount to O: *lit:"" olr eaurr
"t""#
Calculate the amount i
December each.y€a:'
company ends on 3f ,-- of Rs.100 each at Rs.g5 0n 1.1.91'As
debentlj?;;;;;;;;"d
c5' (a) Alimited co' issued 2'000
\d'
10%
at the end of 5 vears'

.l
g"J"il:;:x*i;i'?"T::::T'?ffi;".,;:J;;; i" o'"ioandl0ssaccount
.il
I
:l
.{
,,,:':lJ;;vqT.lr?i':::*:'"3":ft
\w, ::ffi l,'#':',ln;lT.:i:'X'iJ'%.i
s
+i
r.r
' "*oin''z'oo'oo9:]nll""ll11l','"lllr'n.. .

Ia, :ru[:::.
:q-
?..
ffi10 years atid
,., H:::fi after
repayaole
#H-';:
a premium ot :, J ::.""1i il ;,ff
E
. (c0 Loss on issu"
li (b) capital Reserve Rs 10'000; "**":::":^t-t'2'00'000]
rl'
Ans. [(a) rs.2,000; ""',:J
6. A company issued b,000 debent:f:: :::' ; TjflT;:Jil""I"J,il:1i"1t;:
;ks * * : :l'*i'l'Ti{ihi}:*1i *i:iru "x il"'Hliil::
show that Re 0 ,ui6ii'."*": T:l ;lnTil:l:n'i;"%#J"v'. il.n o,'"*"
realized Rs 3'90'uuu'
\-,',,*.",""0.
199g the investmenis Give the necessary iournal
Tl're debentures werl#i;t";;;;;ts were made to the
nearest
stood at Rs'1 '45'600' that tr
and assume
entries' ledger accounts
Rs 10' lebit balance

. In the Barance Sheet

or a *'lilv: lh' :i'-:""THi$T#::T How wirl
7
ot n"u'o00 Every vear
Rs'5'00Q
': ":1t^tft:i ;""""'o-"J ''*::::h
tnu first vear and second
;;; the dlscount on debenturesacco
"how oi the company '
year in the balance sheet

352